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The market: still far too soft

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Captive insurers: oil spill experience

Climate change: the industry impact

Raising Suncorp How Patrick Snowball, Mark Milliner and Anthony Day are reshaping the group’s insurance brands August/September 2010


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Contents 6 Newsmakers » 10 The market: still far too soft » The general insurance industry’s progress isn’t fast, but it is steady.

14 What’s the Big Deal? »

There isn’t one. M&A activity at the top end of the market is unlikely, for many reasons.

18 Natural born killers »

Two Australian storms have contributed to reinsurers’ record first-half natural catastrophe losses.

lawNEWS

40 Nothing stands still for long » Insurance lawyer Samantha O’Brien keeps up with the swift pace of change.

42 Harmed by horror »

Two rescuers at a crash scene pursue a case for pure mental harm to the High Court.

44 If it’s complex, use a broker »

A recent court case highlights the pitfalls of negotiating PI cover insurance in big commercial contracts.

20 Captured »

Has the use of captive insurance saved BP, or damned it to enormous losses?

24 Raising Suncorp »

How Patrick Snowball is putting Suncorp’s insurance businesses on parallel but separate lines by sharing pricing and claims.

30 Back on the road again »

Lloyd’s recalls Keith Stern to the UK to do something he’s become an expert at – building relationships.

32 Hoping for a better harvest »

Major insurers are hoping to reap rewards from investing in the farm sector.

34 A tough place to be a broker »

Business culture and restrictive laws crush broking in Japan.

36 Swiss Re’s Asian tiger »

The global reinsurer is finding plenty of growth potential in the region’s emerging markets.

38 Opening up the office »

Macquarie Group’s new building shows how a work environment can inspire.

46 Why understanding climate change is vital »

companyNEWS 52 54 56 59

Lumley’s newest team » Back to the future with Z.streamXpress » Goodbye to the sandbag » Reputation is important, too »

peopleNEWS 61 62 64 65 66 68 70 71 72 73

To be Frank, one of the best » Leaders farewell Lloyd’s Keith Stern » SLE, Pacific launch a ‘new innings’ » Calliden combines business and beauty » Insight explores the possibilities » Crawford launches its large loss division » Lions, tigers, brokers, kids and one swan » From Africa to Great Lakes » Queenslanders vote for QBE » MGA meets in Christchurch »

74 maglog »

The insurer that prices to recoup future losses will be better off.

August/September 2010

From left: Mark Milliner, Patrick Snowball, Anthony Day Image: Cameron Ramsay Story page 24


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newsmakers at

insuranceNEWS.com.au Trying again

And now, China: The Australian and New Zealand Institute of Insurance and Finance (ANZIIF) is the QBE of the local associations as it extends its services further into Asia and the Middle East. The latest country to welcome the ANZIIF educators is China, where Chief Executive Joan Fitzpatrick has set up a strategic partnership with the country’s Insurance Professional College (IPC). Established in 1986, IPC is China’s only vocational insurance education college and is owned by China’s largest insurer China Life Insurance Group Company. IPC will promote and market ANZIIF-certified education products and services, improving access for Chinese students and insurance professionals to internationally recognised training.

Insurance brokers have long known their work is among the most rewarding in the workforce. Now the latest survey from IbisWorld proves it – in financial terms, at least. The survey says the $3.6 billion insurance broking sector will experience phenomenal growth in the 2011 financial year. Revenue, wages and employment will be pushed to new heights as insurance broking occupies the number three spot in IbisWorld’s grid of the top five growth professions for 2010/11. However, it won’t last forever. IbisWorld analyst Suzanne Walker says brokers have a small window of opportunity to make hay until market conditions turn around in 2014 and the sun stops shining on brokers.

Reuters

Setting a premium to match the size of the risk might seem logical, but it’s not always that way in the wonderful world of workers’ compensation. Now the New Zealand Government has told its wholly owned Accident Compensation Corporation (ACC) to set up a system that aligns compensation levies with the actual risk. In other words, if you run a safe operation you’ll pay less than the cowboys. From April 1 next year the ACC will apply discounts and loadings to workplace levies – a move ACC Minister Nick Smith (above) says will improve workplace safety. It’s actually a return to the system that was in place for 28 years in NZ before the last Labour Party-led government repealed it in 2000. Under the changes, employers paying more than $10,000 a year in ACC workplace levies will face a discount or loading of up to 50% based on their claims history. For smaller employers, a simpler no-claims bonus and high-claim loading will apply.

Broking is ‘hot’:

Big bang theory Even as Iceland’s Eyjafjallajokull volcano becomes a new tourist attraction (above), insurer Chartis has offered some crumbs of comfort to the millions of global travellers whose flights were grounded following its eruption on April 16. Last month Chartis clarified its views on whether it will pay claims on policies purchased after April 16. The insurer says future flight disruptions caused by volcanic ash will “in most cases, be unforeseen or unexpected”. And in that case, they’ll pay. But if people buy travel insurance knowing a volcano will almost certainly disrupt their trip, getting their future claims paid will be “unlikely”.

Kelly comes home: The appointment of Kerrie Kelly as Director-General of the Association of British Insurers (ABI) late last year was seen as a pinnacle in the career of the former Insurance Council of Australia chief executive. But last month Kelly (above) was returning home from London after just five months in the UK job, her reputation bruised and battered by critical media reports. Back home, some people weren’t all that surprised at the news. Kelly’s feisty management style wasn’t to everyone’s taste, and ICA’s effectiveness was seen to have been altered but not necessarily improved during her three-year tenure. No one in the ABI was saying officially what led to Kelly’s abrupt departure from her powerful £250,000plus ($430,000) job running the 400-member peak body, beyond that she was returning to Australia for “personal reasons”. But one media report said she lost the confidence of the 14-member ABI board, offered her resignation in writing and had it accepted. According to an unnamed board member quoted by the Daily Mail, “if she hadn’t offered her resignation… she would have been pushed out”. The Daily Mail’s unnamed ABI director was quoted as saying Kelly “wasn’t focused enough”. “Some of the issues we were talking about were quite technical and she didn’t appear to pick it up.” Another report suggested Kelly wanted to change the ABI structure, but the board disagreed. “She was not brought to the ABI to do that,” the source was quoted as saying. “The ABI is a strong trade body with a strong management team.”

“There’s a lot to do and we want and need someone to drive this through. Kelly, unfortunately, wasn’t delivering.” – UK’s Daily Mail quotes an ABI director on the resignation of Kerrie Kelly

Figure this

2

2.08

65

The latest dollar estimate of insured losses from the Perth and Melbourne hailstorms

The total amount in dollars of general insurance premiums collected in 2009, according to Swiss Re

Percentage of Australians working in financial services who have post-school qualifications

BILLION

6

TRILLION

insuranceNEWS

August/September 2010


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Job market frees up Recruitment agencies are searching for footloose insurance professionals as companies gear up for extra activity over the rest of the financial year. Recruiting firm Hays says brokers and claims specialists in professional and financial lines are highly sought after, with “a renewed enthusiasm to recruit [bringing] stability and fresh optimism to the market”. Rising numbers of vacancies will lead to a spike in candidate interest, according to the experts. They say employers should expect a rise in the number of people leaving their secure roles in search of new and lucrative opportunities.

Somehow the word “council” conveys more muscle than mere “association”. That may be the thinking behind the decision to change the name of the Investment and Financial Services Association (IFSA) to the more grunty-sounding Financial Services Council. Announced last month by Chief Executive John Brogden (above), it’s all part of an “expanded mandate” that will include actively engaging in economic policy development in Australia. Brogden says the move reflects the growing importance of the financial services industry.

NSW Rural Fire Service

A name with grunt:

Embarrassing: As New Zealand intermediaries brace for an onslaught of new laws governing the way they do their work, the long-serving chief executive of the country’s Investment Savings and Insurance Association (ISI) has quit over civil and criminal charges that he misled investors. Vance Arkinstall says he will “strenuously defend” allegations he and five other directors of North South Finance deceived investors over the financial state of the company by providing misleading or incorrect information over party transactions, lending standards, loan qualities and liquidity. “Resignation is the proper course,” he says. Arkinstall faces up to five years’ jail or fines of $NZ300,000 ($242,000) under the criminal charges, and could also be fined up to $NZ500,000 ($403,000) under civil pecuniary provisions if found guilty.

Signs of life: Life insurance is continuing a remarkable run of growth, with life companies pulling in a total net profit of $1.985 billion last year. The first edition of the Australian Prudential Regulation Authority’s (APRA) new half-yearly report on life insurers reveals an aggregate $38.78 billion in net premium in the year to December. Net policy payments amounted to $35.41 billion while industry revenue totalled $24.45 billion. Life insurers held total assets of $230.55 billion at year end while net assets totalled $16.43 billion. The industry’s solvency coverage was 1.91 times the minimum required to meet the solvency reserve while insurers achieved a return on net assets of 11.9%.

More cuts to come? The New South Wales Government has killed off an unpopular insurance tax – but does that really justify a sudden burst of optimism that the fire services levy might be next? Probably not. The state’s budget is focused purely on the Insurance Protection Tax (IPT), which was introduced as a levy on insurers after the collapse of HIH. Its aim was to ensure the industry shared the cost burden of outstanding insurance claims. The tax will be removed on July 1 next year, and save the insurance industry $69 million a year. But cancelling a tax that always had a limited lifespan is very different from dropping a levy under which insurance-buyers become the major funders of the state’s fire services. NSW will make $1.912 billion in insurance taxes this financial year – $98 million more than it makes from gambling and betting taxes.

25

9.2

487

The cost in dollars of worldwide insured losses from natural catastrophes in the first half of 2010

The value in dollars of insured losses from the February 27 Chile earthquake

Amount paid out in dollars last year by local professional indemnity insurers

BILLION

BILLION

insuranceNEWS

MILLION

August/September 2010

Booms, busts, thrills and spills: The past few months have been all about booms, busts and break-ups for the insurance industry. In the face of what commentators say is a slowly improving market for insurers – brokers and underwriters can’t seem to agree on whether the market is “still soft” or “hardening at last” – the big insurers are nevertheless feeling the pinch. Wesfarmers and IAG weren’t able to share good news with their shareholders. Both released downgraded profit targets after storms in Perth and Melbourne – and in the case of IAG a toxic UK market – chipped away at their profit margins. Gushing oil wells were all the rage in the 1920s and ’30s, but now they’re just cause for rage. The barrage of criticism directed at oil giant BP may abate a little after the UK company managed to cap its gushing well in the Gulf of Mexico. Good news for the insurance industry is that the insured losses should be capped at no more than $US3.5 billion ($4 billion) – a mere drop of crude in a barrel of total losses expected to reach more than $US70 billion ($80 billion). Exposure to the oil spill – and other natural events – hasn’t significantly dented the balance sheet of Australia’s global insurer, QBE, which remains on track for a first-half insurance profit between 16% and 18%.

New man at APRA: Following the retirement last month of Executive Member John Trowbridge from the Australian Prudential Regulation Authority board, Ian Laughlin (above) has been appointed as his replacement. An actuary with extensive experience in the financial services and insurance industries, Mr Laughlin began his three-year term at the start of last month.

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newsmakers at

insuranceNEWS.com.au 2009 Victorian Bushfires Royal Commission

Movers:

Exposing the truth behind heartbreak and hubris This has been a typical day at the Victorian Bushfires Royal Commission. There’s a lawyer on his feet at the front of the room, asking interminable questions that grind down into the details of what happened in the February 2009 bushfires that killed 173 people. There’s lawyers representing interested parties like the Country Fire Authority and the State Government, members of the public ranging from emotionally scarred residents and bereaved families to the merely curious. Journalists listen and type as a cameraman records proceedings. Facing us from the far wall is the Royal Commissioner and his team. Former Supreme Court judge the Hon Bernard Teague AO is flanked by former ACT Ombudsman Ron McLeod AM and Victorian State Services Authority Commissioner Susan Pascoe AM. Within these bleak beige walls at 222 Exhibition Street in the Melbourne CBD the commissioners have heard stories of hubris, horror, heartbreak and heroism and sometimes just pure bad luck. Over the 12 months to May 27 they have heard from many different people and organisations; they have seen reputations undone

and important scalps claimed. And they’ve raised subjects they originally didn’t think they would have to consider. Its most important departure from the central theme of “why” came last November, when the royal commission released a discussion paper canvassing views on the fire services levy and its impact on residents’ ability to protect their properties. As this edition went to press the royal commission was just a few days off presenting to the Victorian Government its full report on what was learned from 434 witnesses in 155 days of hearings in this room and at regional centres. There were also 26 separate community consultation sessions, 1700 submissions and 20,500 pages of written transcripts. The royal commission’s comments on the fire services levy may well be critical of the Government, and they may well be ignored. But criticism should serve as one more convincing illustration that the fire services levy is outdated, inequitable and that it can and should be abolished.

“They have seen reputations undone and important scalps claimed”

PUBLISHER/EDITOR: TERRY McMULLAN McMullan Conway Communications Pty Ltd Tel: + 61 3 9499 5538 Fax: +61 3 9499 5535 Email: publisher@insurancenews.com.au ADVERTISING: NAOMI CONWAY McMullan Conway Communications Pty Ltd Tel: +61 3 9499 5538 Fax: +61 3 9499 5535 Email: naomi@mccmedia.com.au ARTWORK DELIVERY TO: McMullan Conway Communications Pty Ltd PO Box 116, Ivanhoe VIC 3079 Australia or 763 Heidelberg Road, Alphington VIC 3078 (COURIERS ONLY) Email: naomi@mccmedia.com.au

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A McMullan Conway production

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Ace Insurance has appointed Giles Ward as Chief Executive for Australia and New Zealand. He succeeds Damien Sullivan, who has been promoted to run Ace’s Asia region operations from Singapore. Mr Ward has previously served as Regional Managing Director for Ace Middle East and North Africa. Specialist insurer Ansvar has chosen former software company executive Andrew Moon as its new Chief Executive. He replaces the long-serving John Peberdy. Perth-based Andrew Godden, Managing Director of Specialised Broking Associates (SBA), has been appointed Managing Director of Arthur J Gallagher Australia. He will retain the role of Managing Director of SBA, which is 40% owned by Arthur J Gallagher. QBE European Markets MD Doron Grossman will return to Sydney next month to become Executive GM for QBE Australia’s Affiliated Businesses division. A popular figure in Australian broking circles, Mr Grossman built up broker cluster group IBNA before he was recruited by QBE Europe in 2000.

Material in insuranceNEWS (the magazine) is protected under the Commonwealth Copyright Act 1968. No material may be reproduced in part or in whole without the consent of the copyright holders. The content of articles appearing in this magazine do not necessarily reflect the views of the Publisher. All statements made are based on information that is believed to be reliable and accurate, but no liability is accepted for any fault or omission. We also accept no responsibility or liability for any matter published in this magazine that reflects personal opinion. Printed on FSC paper stock using vegetable based inks by a printer with ISO14001 Environmental Management System Certification.


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The market: still f The general insurance industry’s progress isn’t fast, but it is steady By Jamin Robertson

10

THE AUSTRALIAN GENERAL INSURANCE industry has emerged from the global economic downturn in good shape, but soft market conditions will hang around for some time to come. The Pendulum 2010 report by actuarial consultants Finity, released last month, confirms excess capacity is continuing to drive strong competition in the market, leading to pressure on rates despite the best efforts of insurers to impose widespread increases in premiums. Finity draws on a wide variety of information sources to compile the review, including heavy reliance on a range of statistics from the Australian Prudential Regulation Authority (APRA). The figures released last month build a compelling argument for the local industry’s financial fortitude, highlighted by the $4.2 billion in after-tax profit general insurers recorded in the year to March 31, against $2.2 billion in the previous period. But despite that result, Finity says industry profitability remains well off the highs of 200307, with no signs of a return to these levels in the short term. Return on equity rates have hovered around 10% for 2008/09 with a projected uptick for 2009/10. The insurance trading result remains at around the 10% level despite falling some way from the highs experienced during the middle part of the past decade. “The industry’s quality is shining through,” Finity Principal Andrew Cohen says. “While some lines we red-flagged were affected by the downturn, it was nothing unexpected.” While Mr Cohen cautions that strong growth insuranceNEWS

August/September 2010

in premium is partly a consequence of new local regulations forcing foreign insurers to register local subsidiaries, the prospects remain sound for the industry in Australia. The nine months to March indicate a combined ratio returning to around 100%. The profitability yardstick for listed insurers increased to 105% last year. Gross written premium growth of 7% last year is around three percentage points higher than previous years from 2006-08. Even the destructive March hailstorms in Perth and Melbourne are not anticipated to cause too much pain, with healthy loss ratios continuing to drive after-tax returns on capital in motor lines beyond 15% in recent years. While the estimated $1.85 billion cost of those storms will certainly put a dent in insurers’ profits, they are only expected to slow progress rather than present a major obstacle. In other related lines, poor exposure and ongoing claims inflation have negatively affected the performance of building cover in householders lines, which are now being propped up by strong premium increases and a favourable experience in contents line. All told, general insurers are expected to return to underwriting profit in the year to June, although most remain some distance from the halcyon days of 2005-07 when combined ratios rose to the high 80s. Investment returns, albeit lower, are also showing signs of returning to normal, with March figures of 5.4% coming off a December quarter at 6.2%. Both quarters compare


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ll far too soft favourably to the June 2009 quarter of -1.1%, when the global downturn was busy biting into investments. Capital adequacy is off the top of the cycle high, but is still around double the required minimum standard with a ratio of about 1.97. Among the commercial classes, professional indemnity loss ratios increased as expected in light of the downturn, although net profitability remains good, with report authors suggesting reinsurers are bearing much of the cost. Directors’ and officers’ loss ratios are expected to climb above 100%, although the Finity report claims this class of business appears to have escaped much of the doom and gloom forecast 12 months ago. Liability margins are also under pressure as declining premium rates and higher claim costs hike up loss ratios, while workers’ compensation underwritten by the states has demonstrated lower claims frequency and premium rates. Compulsory third-party lines have demonstrated mixed results, with rates increasing in New South Wales as tighter regulator control drives rates down in Queensland. Overall, the results reflect a healthy industry position as it emerges from the worst effects of the global downturn. In an analysis of future issues likely to affect the industry, Finity has rustled up a grab bag of both new and old concerns. They include the ongoing effects of the insurance cycle, tort reform, and further consolidation, while the rise of the internet and aggregator sites, technical improvement in underwriting and the always-controversial insuranceNEWS

August/September 2010

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Left: Buoyed by relative improvement in the six months to December 2009, the industry’s underwriting ratio has improved from 2008. Below left: Between 1988 and 2004 expense rates were on a continuous reduction, driven by productivity gains from such factors as industry consolidation and cheaper personal lines distribution. After a short period of increase in 2005/07, the trend appears to be flattening. Bottom: The return on equity in 2009 rebounded as a result of much-improved profitability in the second half of the year. While the first quarter of 2010 will put a dent in ROE due to high weather event impacts, Finity nevertheless expects the full-year ROE to be above 10%.

“The power of the internet will win out over the next 10 years. Consumers are keen to compare and buy, though brands will still be important.”

issue of flood cover are also likely to keep insurance strategists busy. Mr Cohen says progress on the thorny issue of flood cover by the Insurance Council of Australia, Zurich Financial Services Australia and Suncorp does not yet represent a “breakthrough” for Australian consumers. “It’s a bit hit and miss, and there is some way to go,” he told Insurance News. Fortunately, ongoing progress on the national flood information database is expected to provide a widespread solution within the next decade. Mr Cohen notes the rising prominence of direct online insurance players will have an effect on personal lines, suggesting those who are slow to innovate may soon be overtaken. “Our viewpoint is that the power of the internet will win out over the next 10 years,” he says. “Consumers are keen to compare and buy, though brands will still be important.” For insurance brokers, the news is good, with Finity predicting their lion’s share of the commercial market is likely to remain firmly in place. “The inherent complexity of business insurance means that most businesses will continue to choose the services of a professional broker, an expert that they regard as being on their side,” the report says. So while some things are projected to change, others are likely to stay the same. Consolidation is likely to see the top 10 insurers become just six or seven by 2020, while it seems talk of the death of the insurance cycle has been greatly exaggerated. “The underlying features of the market have not changed in ways that remove the cycles from  commercial lines markets,” the report says.

Source: Finity, APRA, Office of the Insurance Commissioner, Insurance and Superannuation Commission

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- Finity Principal Andrew Cohen


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What’s the Big Deal? There isn’t one. M&A activity at the top end of the market is unlikely, for many reasons

A DECADE OF COLLAPSES, MEGA MERGERS and industry consolidation is bound to leave even the most bullish investor clawing for air. Considering the boom and bust years defining insurance in the Noughties, the outlook for further merger and acquisition activity over the next 10 years looks positively dreary. Far from creating opportunities for insurers to pounce on weakened adversaries, the global financial crisis appears to have done just the opposite – consolidated an already consolidated industry. Even the on-again off-again union of the industry’s two largest insurers, QBE and IAG, appears to have been downgraded from unlikely to remote, according to analysts contacted by Insurance News. IbisWorld analyst Michael Wilson says

QBE would have to be willing to adjust its strict acquisition criteria to make any proposal work. “Changes in the share price of both companies have effectively made that sort of offer considerably more expensive for QBE if the same thing was attempted today,” Mr Wilson told Insurance News. “While QBE is well funded and has certainly been successful in the last two years, a merger may not represent the value it seeks right now, even though it is logical from a business perspective. “IAG’s earnings downgrades this year might mean they would be willing to accept a less favourable offer, so it would come down to some negotiation. But on the surface, it would be quite expensive for QBE unless they [could] renegotiate the type of offer.”

Credit Suisse analyst Arjan van Veen agrees the failed super-merger of 2008 is unlikely to be revisited. “In some ways the moment has passed,” he told Insurance News. “The issue for QBE is that their acquisition criteria is for it to be accretive in year one, so a deal with IAG wouldn’t work any more from QBE’s point of view.” So if QBE and IAG’s Last Tango in Paris moment has passed, what of other possible industry consolidation? Taking a look at the top 20 insurers in the market reveals no obvious targets. Assuming QBE, IAG and Suncorp’s only realistic takeover partner is a large offshore company, there are few independent insurers on the table. Wesfarmers has confirmed its insurance

Top 15 general insurers

Source: PricewaterhouseCoopers Insurance facts and figures 2010. Published annual financial statements or APRA annual returns, including segment reporting for organisations with significant non-general insurance activities

Notes:

World wide premium is included for those companies/groups based in Australia, while only premium under the control of the Australian operations are included for those with overseas parents.

Where a group has significant non-general insurance operations, only performance and position information relating to general insurance is disclosed (subject to availability). In some instances this involves estimating a notional tax charge for the result after tax. Outstanding claims are net of all reinsurance recoveries.

1. QBE acquired Elders Insurance effective 30 September 2009. Comparative figures are for QBE only.

2. Disclosure of investment result from insurance operations was not available in Wesfarmersʼ financial statements.

3. Westpac acquired St George Insurance Australia on 1 December 2008. Comparative figures are for Westpac only.

4. The Commonwealth Bank acquired St Andrewʼs Insurance (Australia) on 19 December 2008. Due to inconsistencies in reporting dates, information for St Andrewʼs has not been included.

5. RAC Insurance changed its year end to June during the 2008 financial year resulting in accounts being prepared for the six months to 30 June 2008. Financial performance figures for the six months to 30 June 2008 have been extrapolated for comparative purposes.

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operations aren’t for sale as it invests heavily in people and systems, while Westpac and CommInsure would be unlikely to pare their revenue base while their insurance operations are still turning a profit. Genworth Financial Mortgage Insurance, the eighth largest insurer by premium volume, is part of a larger international network, as is Chubb (number 12), Chartis (13) and Ace (15). The best acquisition on the horizon at present will be the sale of Suncorp’s 50% share of its insurance joint ventures with motoring groups the RACQ and RAA. Suncorp said last month it expects to make $110 million to $125 million from the sales. Suncorp acquired the stakes in Queensland’s RACQ and South Australia’s RAA under a 2001 buyout of AMP’s general insurance assets. Both operations are profitable, but they no longer fit with the insurer’s desire to control everything it sells. With QBE, IAG, Suncorp and Allianz Australia collectively accounting for about 51% of net premiums in 2008/09, IbisWorld’s Michael Wilson says the potential for consolidation is limited from both a business and regulatory perspective. “The ACCC [Australian Competition and Consumer Commission] has been pretty active in the past few months in terms of

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being willing to knock on the head proposals they don’t think are in the interest of a competitive industry,” he says. “So for any other merger proposals, it is not just a matter of whether the numbers add up for the companies in question.” JP Morgan analyst Siddharth Parameswaran says the commission’s opposition to NAB’s bid for Axa Asia Pacific Holdings shows the regulator is taking a cautious approach to further consolidation in financial services. “Among the big [insurance] players I don’t see scope for much consolidation,” he told Insurance News. “I think there can be consolidation at the lower end, and there is still scope for a small entity to be picked up by a big one. But I think it is going to be harder from here on in to get the ACCC to allow anything major to go through. “The ACCC’s decision in regard to Axa shows that they are being much harder in relation to how they look at competition issues. “They are being much more prospective in trying to foresee the best way of encouraging competition, rather than just looking at whether there might be material movements or reductions in concentration.” Mr Wilson says while he doesn’t think the ACCC is “out to get anyone” the recent

“Acquiring very small companies is often not worthwhile for larger companies, unless they are in a strategic or geographical product segment that the larger company wants to get into.” - IbisWorld analyst Michael Wilson

Market share of top 5 players (2005-2009)

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insuranceNEWS

consolidation in financial services-related industries may mean the regulator is keen to preserve the existing level of competition in the insurance market. “What we have got now in the general insurance industry is a reasonably diverse spread of general insurers,” he says. “Instead of just two or three very major players and nothing else, there are about nine insurers that are operating on a reasonable scale. “So there is a reasonably competitive marketplace out there at the moment and the ACCC might be looking to proactively defend that position.” In the Australian life insurance market consolidation is even more pronounced, with the four largest life insurers accounting for about 77% of total Australian premium income at the end of 2007. More dramatically, the top 10 life insurers accounted for 95% of insurance income during the same period. Mr Wilson says these figures highlight the challenges of potential mergers and acquisitions at the top end. “Any acquisition opportunities or mergers really have to be between those 10 players in order for it to be worth the effort,” he says. “And there are risks with bringing in an insurer or merging with one – it’s not just bolting on extra income to the side of your business. “That’s why acquiring very small companies is often not worthwhile for larger companies, unless they are in a strategic or geographical product segment that the larger company wants to get into.” So if growth for Australia’s big insurers is unlikely to come through mergers and acquisitions, what will the top end of the market focus on as they strive to improve their numbers? The last few years have seen the rise of niche brands, with Suncorp designing its entire corporate strategy around its “one company, many brands” approach. Other insurers are in various stages of partnering with established non-insurance brands to gain access to their customer bases. Australia Post (underwritten by Auto & General Insurance), as well as Kmart and Coles (Wesfarmers) have already entered the insurance market, with department store Myer and Coles competitor Woolworths also setting up to tap into this additional revenue stream. But real growth comes from big acquisitions, and as QBE regularly demonstrates, the big deals are overseas. “The global financial crisis has created opportunities overseas that are perhaps more striking and unusual than what has been closer to a business as usual environment in Australia,” Mr Wilson says. “So I think while two insurers in Australia may get together and nut out a deal, there are in fact better opportunities overseas right now. “QBE is currently quite active in seeking out those overseas opportunities, and they are probably in the strongest position. They have a large footprint in most parts of the  world already.”

August/September 2010

GIO014


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As a broker you want to know your customers’ claims will be dealt with efficiently, but also effectively. Over eighty years ago, we started out doing workers compensation. Since then we’ve honed our knowledge and expertise, so you can be certain the details of your customers’ claims are in safe hands. For more details, contact your Relationship Manager or call 1800 767 991

WORKERS COMPENSATION

In NSW, GIO General Limited ABN 22 002 861 583 (GIO) operates as an agent for the NSW WorkCover Scheme. In Victoria, GIO Workers’ Compensation (Victoria) Limited operates GIO0148/FPC/IRM/R as an agent for the Victoria WorkSafe Authority. In WA, ACT, TAS and NT, Workers Compensation Insurance is issued by GIO.

GIO0148_297x210_FP_IRM_R.indd 1

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Hail the winner: Melbourne’s Flemington racecourse weathers the vicious March 6 storm that cost insurers and reinsurers $1.04 billion.

Natural born killers Two Australian storms have contributed to reinsurers’ record first-half natural catastrophe losses By Jamin Robertson FOR MELBOURNE RESIDENTS, IT WAS A BAD one. Many in Perth had never seen anything like it, either. Five months on, the severity of the two storms is confirmed with insured losses climbing to more than $2 billion. The destructive storms which struck Melbourne on March 6 and Perth on March 22 comprise just two of 440 natural catastrophe events to occur worldwide between January and June, resulting in record first-half global natural catastrophe losses estimated by Munich Re at $US70 billion ($79 billion). The Perth storm incurred insured losses of $1.05 billion, according to the latest figures held by the Insurance Council of Australia, while the storm in Melbourne cost $1.04 billion. An earlier Munich Re evaluation ranked the Melbourne event as the more costly of the two Australian disasters at $US920 million ($1.04 billion), making the storm the fifth most expensive global natural catastrophe of the first half. 18

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August/September 2010

The rising frequency and cost of natural catastrophe events in the year to date is underlined by the fact that overall economic losses of $US70 billion already exceed the entire cost of last year, with six months of the year still to run. Record insured losses of $US22 billion ($25 billion) during the half are more than double the first-half average over the past 10 years and follow an earlier report from reinsurer Willis Re that put first-quarter losses of $US16 billion ($18 billion), which was itself a record. Devastating earthquakes in Haiti and Chile were responsible for much of the damage, with the 7-magnitude Haiti earthquake on January 12 killing 222,570 people and causing $US8 billion ($9 billion) in economic losses. Poor insurance penetration restricted insured losses to just $US150 million ($170 million). A more powerful 8.8-magnitude earthquake in Chile six weeks later resulted in economic losses of $US30 billion ($34 billion) including $US8 billion


News Ltd

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in insured losses. Vastly superior building standards in earthquake-prone Chile proved their worth in contributing to a much lower death toll of 521. Both the alarming frequency and severity of natural and man-made catastrophe events have prompted Lloyd’s Chief Executive Richard Ward to warn insurance executives of the need to prepare for “a tough year ahead”. Mr Ward told an industry seminar in London the fallout from costly events such as the Chilean earthquake and Gulf of Mexico oil spill is likely to be felt for months to come. He has previously warned the industry is facing a “perfect storm”, serving to underline the importance of improved underwriting discipline as subdued investment returns only exacerbate the pressure on margins. Global insurers who maintain discipline and avoid risky short-term profit “stand the best chance of long-term survival”, Mr Ward says. His comments illustrate the tougher conditions Lloyd’s has endured this year compared to a relatively benign 2009 when it earned £3.87 billion ($6.7 billion) in gross profit including £1.4 billion ($2.4 billion) in underwriting profit. A dramatic increase in catastrophe events has prompted a warning that one more serious disaster stands to wipe out all that good work. Given such a precarious environment, this is a

the world saved.

time for fiscal restraint, with the reckless pursuit of topline growth regarded as a shortcut to financial ruin. “We’ve helped protect the economy during the [global financial] crisis,” Mr Ward says. “Now it’s time to protect ourselves.” Such a conservative standpoint gains credence when placed in the context of a report by expert UK forecasting body Tropical Storm Risk (TSR) that has predicted a particularly active Atlantic hurricane season. The hurricane season in the Atlantic began on June 1 and will officially end on November 30, with a pre-season report from TSR predicting 16 tropical storms during the period, comprising eight hurricanes – four of them to be classed as “severe events”. Five tropical storms, including two hurricanes, are expected to make landfall on the United States mainland. Researchers say every reliable indicator points to hurricane activity being well above the norm this year. Should they continue their previous good form in picking the most active hurricane seasons in advance, 2010 is set to rate among the most costly years on record for natural catastrophe losses, with an obvious impact on global insurance industry  profitability.

sometimes, it takes calling in a specialist to save the world. indemnitycorp is the trusted partner to many brokers across Australia. We help you protect your clients with specialist wholesale insurance products which are designed & priced to help them to succeed. Our products include: tLife Science Liability tResidential & Commercial Strata tPenaltyProtect - Fines & Penalties tMiscellaneous P.I. tAir Conditioning Contractors Call us on (02) 9034 5555 or visit us at www.indemnitycorp.com.au to see how we can help you to save the world.

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Captured Has the use of captive insurance saved BP, or damned it to enormous losses? By Ben Oliver ENERGY COMPANIES LIKE BP HAVE FOR decades grown fat and rich off the black stuff flowing deep within the earth’s crust. Now the source of BP’s wealth threatens to destroy it. The sheet of crude oil blotting much of the Louisiana and Florida coastline in the Gulf of Mexico following the loss of the Deepwater Horizon drilling rig is an apt metaphor for the liabilities now contaminating the giant British company’s balance sheet. The estimated losses for BP are potentially ruinous. Analysts are predicting losses in the tens of billions, with Goldman Sachs predicting a $US70 billion figure – more than four times BP’s 2009 operating income. 20

BP has already paid more than $US3 billion in claims and clean-up bills since its offshore well ruptured in April. It’s expected to easily surpass the $US7 billion in fines and recovery costs incurred by ExxonMobil for the 1989 Exxon Valdez spill. Despite what’s becoming the dirtiest and most expensive man-made disaster in history, the insurance industry has come out of it all surprisingly clean. The Insurance Information Institute (III) estimates insurers’ liabilities from the Gulf of Mexico oil spill at $US1 billion to $US3.5 billion – a proverbial drop in the ocean compared to the total losses. Saving the insurance industry from cataclysmic losses is BP’s model of risk retention. insuranceNEWS

August/September 2010

The company has for a long time self-insured its risks through a captive insurance company, Guernsey-based Jupiter. While it has saved BP hundreds of millions in premiums – not to mention the cute tax breaks such an enterprise provides – the use of captive insurance may have now left BP critically exposed. BP can only tap Jupiter for $US700 million – money already spent on clean-up efforts. The Gulf of Mexico disaster has also prompted ratings agencies to downgrade Jupiter because, as Standard & Poor’s puts it, “significant uncertainties are likely to remain for some time to come”. While Jupiter has been a major cash cow for BP over the years – it made a tidy profit


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Reuters

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“Would you pay a whole lot of premium on a very unlikely event when you have a really strong balance sheet?” - JLT Australia Chief Executive Leo Demer

Boom times: local tourismbased economies have been ruined by the Gulf of Mexico oil spill, but containment and removal work has provided alternative employment

of $US500 million from $US1.05 billion in premiums last year – its lack of reinsurance cover is now a major problem, according to JLT Australia Chief Executive Leo Demer. “BP probably won’t burn for it, but I would have thought a company like that would have some sort of cat covers or some sort of reinsurance,” he told Insurance News. “They’ve got a good balance sheet and, from what I understand, even after paying out all these losses it’s still not going to make a major dent in their balance sheet.” Hypothetical talk about reinsurance may be moot in any case, as Mr Demer concedes that sourcing affordable reinsurance cover may pose a problem for BP. “BP might say they can no longer afford to go without any reinsurance cover at all, and might take an excess of $500 million for any one loss,” he says. “But then again you may not be able to buy cover for $500 million.” The vexed issue of reinsurance for catastrophic events was recently raised by a United States congressional panel, which is seeking to increase the liability cap for oil spills from $US75 million to $US10 billion. Speaking before the panel, III President Robert Hartwig said the current cap is “laughable”, but the insurance industry can’t underwrite $US10 billion in capacity because it only receives $US3 billion in annual premiums. It’s a point picked up by Wesley Sierk, the President of major US risk consultancy Risk Management Advisors. He told Insurance News BP would have decided against reinsurance because of inhibitive pricing. “When accruing money for low frequency/high severity losses, it is often the case [that] the captive limits its liability and decides not to purchase reinsurance,” he says. “Even if [Jupiter] wrote a policy of $US1 billion and purchased $US300 million in reinsurance, the cost would still be very high. “The way reinsurers price the risk, if a claim comes it will be over a billion. That’s why the premium is so expensive – because it will be a loss/no loss situation. I would not recommend taking the additional risk and searching out reinsurance.” Mr Sierk says the correlation between cost and risk means it’s common for companies like BP to establish a captive with no form of reinsurance. But the choice between captive – or selfinsured fund – and traditional insurance may no longer be an option for companies working in particularly risky enterprises like deep water oil extraction. insuranceNEWS

August/September 2010

In a note to clients in July, Marsh said excess liability carriers have indicated they will add “broadly worded, event-specific exclusions” to their 2010/11 policies to eliminate coverage for the Deepwater Horizon event and future events like it. “Although Marsh is engaged in discussions with these carriers in an attempt to withdraw or narrow these exclusions, this is an emerging market trend that raises concerns for Marsh clients with respect to their 2009/10 policies and, specifically, questions about whether circumstances or claims should be notified now,” it said. Mr Sierk says if insurers continue introducing exclusions, companies will begin shifting to captives en masse. “In the past 10 years, captive growth has increased,” he says. “We have the perfect storm: high premiums, companies not watching the claims payouts and a declining investment environment. “The business people I speak to daily are more distrustful of insurance companies than I have seen in my 18-year career. I think a captive is a great alternative in every sense.” The use of captives as a way of shifting risk has been steadily growing in popularity since the first examples started cropping up in the 1920s. “For companies of significant size, captives are certainly worth having a look at,” Mr Demer says. The idea is simple; create your own insurance company and pay the premiums into that company, which then pays out any claims. No splitting of hairs over coverage definitions – and you get to keep the profits. The first captive insurer was formed in 1861, when a group of London merchants sought out new methods of insurance after a fire destroyed their assets. But it wasn’t until the 1950s that the

The current oil spill liability cap is laughable: Insurance Information Institute president Robert Hartwig testifies in Washington

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“In the past 10 years, captive growth has increased. We have the perfect storm: high premiums, companies not watching the claims payouts and a declining investment environment.”

Reuters

- US risk consultant Wesley Sierk

Sign of the times: BP America Chairman Lamar McKay at a Senate hearing in Washington

term “captive” came into use after it was used by Ohio insurance agent Fred Reiss when he established one for the Youngstown Sheet and Tube Company in Cleveland in 1957. Roughly 5500 captives now operate worldwide, the majority of which are headquartered in low tax havens such as Guernsey, Bermuda, the Canary Islands and the Caicos Islands. Estimates on the percentage of global premium share enjoyed by captives vary between 10% and 30%, while globally captives now hold some $US50 billion in reserves. Mr Demer believes the tax advantages of 22

captives are mostly responsible for their popularity. “Captives in many ways were set up to minimise tax as well,” he says. “If you set up a captive in Bermuda, where the tax rate is bugger all, then you could spend $70 million on buying insurance, stick it in your captive and you’ve just moved $70 million offshore; the captive makes a profit, and because the profits are taxed at 5% you’ve just made a nice little pile.” BP would also have reaped a fine harvest from the tax breaks of its Guernsey-based captive. Mr Sierk says Jupiter “has saved them money and has limited [BP’s] liability”. insuranceNEWS

August/September 2010

But while tax breaks are a nice ancillary benefit, do captives offer a superior risk transfer option for business? If you’re big enough and cashed up enough, the answer appears to be yes. As Mr Demer puts it: “Would you pay a whole lot of premium on a very unlikely event when you have a really strong balance sheet?” However, captives are not just available to global megaliths. New forms of self-insurance, including rent-a-captives and discretionary trusts, are emerging to target the SME market. JLT Australia is one of the very few brokers to offer discretionary trusts to SMEs and local governments. While discretionary trusts don’t provide the same tax breaks, they do reduce paperwork and overheads in the event of a claim. And because they don’t technically qualify as insurance under governance rules, they don’t have to meet some regulatory and capital requirements. Mr Demer says captives and self-insurance aren’t necessarily a “one size fits all” prospect. “Brisbane City Council set up a captive in Guernsey four or five years ago,” he says. “They don’t pay tax, so there are no tax advantages. But you could have put together a self-insured fund and pay your losses out of that. “I would have done it another way and saved them a million bucks.” Regardless of the insurance set-up, nothing is going to save BP from incurring further financial pain. And it’s going to continue until someone finally gets a plug on  that broken wellhead.


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Raising Suncorp Suncorp’s heavy hitters: from left, Chief Executive Personal Insurance Mark Milliner, Group Chief Executive Patrick Snowball and Chief Executive Commercial Insurance Anthony Day

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How Patrick Snowball is putting Suncorp’s insurance businesses on parallel but separate lines by sharing key functions By Terry McMullan SUNCORP HAS RECOVERED FROM ITS post-merger blues following the $7.9 billion Promina acquisition in 2007. More than two years on, it now has a clear plan for moving its general insurance lines forward with a “one company, many brands” strategy, which unifies its underwriting and claims functions while retaining the advantages of marketing into niches. The company is investing heavily in systems that it intends will make it more efficient in the key areas of pricing and claims while cutting costs. It’s a strategy that is transforming the mood in Suncorp’s divisions, where postmerger inertia is being left behind. Gone are the gloomy forecasts and black humour, replaced by vibrant action plans and a confident management team focused on wringing the best features out of the Promina merger. With five operating divisions now in place, around 16,000 employees and more than $95 billion in assets, Suncorp is evolving into the financial services powerhouse John Mulcahy wanted. But the manner in which it’s happening is quite different. Credit for the infusion of confidence and new purpose at Suncorp is being given to the low-profile leadership of Mr Mulcahy’s successor, Patrick Snowball, whose strategy to put the group back on course has been assured and unequivocal. Standing at his shoulders are personal lines chief Mark Milliner and commercial lines leader Anthony Day, two very experienced managers whose role is to make the strategy work. And they’re doing it by working closely together, breaking through the demarcation lines that exist between personal and commercial insurance. Mr Snowball’s predecessor, John Mulcahy, joined Suncorp in 2003 to bed down the $1.4 billion GIO acquisition and stayed on to mastermind the Promina takeover, but couldn’t seem to get the company moving again. He quit in February last year. By that stage Suncorp’s share value had dropped 40% in the space of a year. Its strug-

gling Metway Bank had some ugly exposures and Mr Mulcahy’s plan to make Suncorp a “top 10” listed company by 2008 had fallen apart. It was languishing around No 25. The selection of Mr Snowball as the man to save Suncorp and kick it forward was, in many ways, fortuitous in its timing. The former British Army tank commander left giant insurer Aviva in 2007 after two years managing its UK businesses and then, after a year as chairman of major investment group Towergate, he quit after plans for a £3 billion ($5.1 billion) public listing were shelved. Mr Snowball joined Suncorp in September last year, and wasted no time in subjecting the entire group to a very thorough examination. One of his first acts was to place the general insurance divisions in the hands of proven performers, moving Mark Milliner across from running the commercial insurance arm to become Chief Executive Personal Insurance, and promoting Intermediated Distribution Executive General Manager Anthony Day to Chief Executive Commercial Insurance. Mr Milliner, an experienced fixer of distressed companies, joined Suncorp in 1994 and became Group Executive of Commercial Insurance in 2006. He’s credited with managing the realignment of the Suncorp, Vero and GIO brands following the Promina merger. Today he manages the group’s diverse range of personal lines brands, including AAMI, GIO, Suncorp, Apia, Shannons, Just Car and InsureMyRide. Mr Day – who oversees the commercial insurance business under the Vero, GIO and AAMI brands as well as the workers’ compensation and compulsory third party (CTP) businesses – joined Suncorp in February 2008. He was previously Zurich Australia’s General Manager for General Insurance. With his management team in place, Mr Snowball set out to restate Suncorp’s strength and rebuild confidence in the group. In November he made his now notorious “get your tanks off our lawn” speech that made it clear to competitors, commeninsuranceNEWS

August/September 2010

tators and critics alike that neither Suncorp nor its constituent parts – including its troubled Metway Bank – were for sale. Mr Snowball decided that with the more toxic elements of the bank business ringfenced, there was no need to get rid of it. That brought him to the seemingly enormous number of businesses and brands Suncorp had accumulated. While competitors like IAG also use multiple brands, the combination of Suncorp and Promina brands has resulted in a bewildering array of 28 niche and mass market brands covering general and life insurance, financial services and banking. Mr Snowball rolled out his “simplification” program in May. The structure he put in place was – at first glance, anyway – normal enough, but it was the strategy behind it that has competitors taking notice. The new “one company, many brands” structure sees Suncorp maintain its myriad general insurance brands under separate personal and commercial lines management, but sharing key functions like pricing and claims. The aim is to remove duplication in costs. It also means any new technologies and systems can be used across the businesses. Mr Snowball sees big advantages in Suncorp’s end-to-end control of its manufacturing, pricing and distribution channels. He says the move to a functional model and a single view of pricing and claims “will ensure the general insurance business leverages scale advantages across all of its brands and unlocks the potential in functional capability that has not been realised to date”. He expects to improve the general insurance underlying margin by at least 3% over the next two years. To make everything work efficiently takes technology, and Suncorp is investing around $120 million in the next few years on single pricing and claims engines to make it all happen and achieve annual benefits estimated at $235 million a year. Mr Day and Mr Milliner see technology as only one component of the game25


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changing program – leadership in customer “touchpoints” like claims are seen as equally vital. No other top five insurer is concentrating to the same extent on sharing back office services with the aim of cutting inefficiencies and costs, while building a business culture that provides a “customer experience” matching the expectations of a wide range of customer types. It’s a complex but logical transition, and one that has the group’s employees onside. Managers are talking to outsiders about the company and their aspirations with a confidence that simply didn’t exist a couple of years ago. The staff have bought the message, and they’re committed to moving forward. For Mr Milliner, on whose shoulders responsibility for much of Suncorp’s preSnowball commercial insurance development fell, it’s an exciting time to be in the company. “Everybody is very aligned around what we’re trying to do, and we have the right people to make the strategy work,” he told Insurance News. While he acknowledges the importance of Suncorp’s banking, wealth management and life insurance businesses, he sees success for the general insurance units as vital for the overall group. “It was why the Promina merger occurred in the first place,” he says. “We wanted a big, strong insurance company as part of the Suncorp group. The sheer size of general insurance in terms of the group is obviously very important.” The two general insurance chief executives may have distinct roles, but the complex web of brands and products and distribution channels means the success of the “one company, many brands” strategy relies on them working closely together – very closely. “There’s a good level of mutual respect between us,” Mr Milliner says. “We get on really well, and there’s a good balance.” His and Mr Day’s areas of responsibility

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Snowball’s Strategy Immediate needs:

 Stabilise the business

 Strengthen balance sheet and capital  Appoint new executive team

Challenges:

U Restore credibility

U Rebuild confidence U Change the culture

occasionally intersect, cross over and even run in parallel. That’s why the only way the two can work effectively is by working together. “It’s actually a fantastic way to work, “Mr Day says. “Mark and I are good friends, anyway, and we’re the sort of people who want to achieve results.” Take the motor classes as an example. By sharing services and improving the support technologies, the many commercial and personal lines brands servicing a variety of customer types end up having a common goal – simply making the customer experience a smooth and stress-free experience. “People are looking for a service that gets their vehicle back to them quickly,” Mr Day says. “That’s one area where we cross over a fair bit through the common claim system that now extends across the business.” Mr Milliner says Suncorp previously split the motor businesses up between the mass market brands of AAMI, Suncorp, GIO and Apia, which comprise 85% of the

From

to

Many brands, many companies

One company, many brands

The old structure

The new structure

Brand A

26

group’s motor premium and 92% of the home premium. “Everything we’re doing now is to get those four working really tightly together,” he says. The smaller niche businesses, like the internet-only Bingle and Insure My Ride, “help to keep the big brands honest to some extent”, but also use the same support systems. “Broadly, there’s more features in GIO and Suncorp [motor products] than there are in AAMI, and given there’s more features it’s always going to be priced differently to AAMI,” Mr Milliner says. “AAMI’s the leading national brand, and also a price leader. But it doesn’t have the bells and whistles some of the other brands’ products have, like choice of repairer in GIO.” “It’s the same story with reinsurance,” Mr Day says. “There’s one reinsurance program across the whole insurance business. The same with risk management. We share where it makes sense. “So we’re continually working together where the best result can be achieved by having one system but many services.” Mr Day says now much of the groundwork has been done, it’s time for Suncorp’s brands to “elevate our performance”. Vero has increased its market share in the broker space from about 6-7% two years ago to about 9% now. “We’re expanding our risk appetite,” Mr Day says. “We’ve had solid growth through the Sunrise platform, increasing our share of premium up from 9.2% in 2008 to 19.2% today. That’s a significant shift in a short period of time. “In the direct SME space it’s much the same story – we’re already seeing some increase in share. We hold about 30% market share in direct SME business through the GIO and AAMI brands. “In the intermediated area we’ve only got about 9%, where it really should be around 15%. It’s time to work that up and really start to realise some of the good work we’ve put in place.”

Brand B

Brand C

Pricing

Claims

Distribution

Pricing

Pricing

Pricing

Brand A

Brand A

Brand A

Claims

Claims

Claims

Brand B

Brand B

Brand B

Distribution

Distribution

Distribution

Brand C

Brand C

Brand C

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“It’s actually a fantastic way to work, Mark and I are good friends, anyway, and we’re the sort of people who want to achieve results.” – Anthony Day

The decision to own all its distribution channels didn’t come without some pain for Suncorp. The joint ventures with the RACQ and RAA (South Australia) were profitable to the group, but under Mr Snowball’s strategy they simply didn’t fit with the group’s determination to run its own race. So out they went. “While these businesses have been very good for us, we’re focused on controlling our own destiny and focusing on our own businesses,” Mr Day says.

With common architecture for some of the new systems being introduced across Suncorp, “we’re building a new world rather than relying on the old. Most of the legacy B2B systems have been moved on already. “But we’ve got to keep investing the money so we can continually upgrade. I think some of our competitors haven’t committed to reinvest in technology, but we have. “Our [distribution] model gives us a competitive advantage in that we actually

Business overview – geographies

service customers from the pure direct business right through to the fully intermediated, and all the iterations between. “If [customers] want full advice on complex products, they can access it through brokers. And for the commoditised lines they’ll go to a limited advice system. We’ve got the capabilities to cater for both. “That’s where you can leverage the scale of our personal insurance arm, and that’s a point where it crosses over. We’re using GIO particularly in New South Wales and

The strategy in brief

Commercial Insurance offers business insurance nationally and participates in all open regulatory schemes for CTP and workers’ compensation

Cost Leadership One team, many brands

NT

BI

BI

WC

CTP

QLD BI

QLD

BI

WC

BI

WC

One pricing approach

CTP

CTP

CTP

WA

BI

WC

One claims model

CTP

NSW SA

CTP

KEY:

ACTIVE

BI

WC

CTP

NOT OPEN

insuranceNEWS

ACT

BI

BI

WC

WC

CTP

CTP

VIC

BI

WC

CTP

TAS

BI

WC

CTP

August/September 2010

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Suncorp Life With so many potential distribution points, Suncorp Life plans to take full advantage of the “one company, many brands” strategy. It plans to double new business in the next three years by focusing on distribution through the direct market as well as through its established relationships with independent financial advisers. Chief Executive Geoff Summerhayes says he is positioning the division to capture the “exceptional growth potential” of the life insurance market. “Asteron is a leading brand for independent financial advisers in a market that is consolidating rapidly with the disappearance of the Aviva, ING and potentially Axa brands,” he says. Mr Summerhayes plans to grow the life arm’s distribution reach and capability through Asteron, while building direct distribution through new life offerings being marketed around the Suncorp, GIO and Apia brands. And similar “simple, cost-effective life insurance products” will also eventually be offered through AAMI.

Vero New Zealand After 16 consecutive years of underwriting profits and a healthy chunk of the market, Vero New Zealand doesn’t have to do much differently to continue growing. Chief Executive Roger Bell’s strategy is therefore to keep pushing for organic growth. He already has a 20% market share through Vero and another 4% through direct insurer AA Insurance, which is 68% owned by Vero NZ. In most of the classes it operates in, Vero NZ claims to be the biggest or second-biggest. Mr Bell says Vero NZ can therefore contribute to the group’s higher revenue targets “with no significant additional capital investment”. Like most insurers, Vero NZ is carefully watching moves to privatise the government-owned Accident Compensation Corporation (ACC). The last time this happened, in 1999, Vero NZ won 50% of the workers’ compensation market “and made substantial underwriting profits”. “If the accident market opens up we will be a leading player,” Mr Bell says. Suncorp values the workplace accident business at $NZ750 million ($609 million), the “earners” account covering non-work injuries at $NZ1.4 billion ($1.13 billion) and the motor account covering crash injuries at $NZ350 million ($284.2 million). Mr Bell says privatisation of the ACC has the potential to “double the group’s scale and profit footprint in NZ”.

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Victoria, while we can use the AAMI brand to market to small SME businesses.” Mr Milliner says AAMI’s new business for motor is almost at 40%. Keeping the distribution and the brands aligned is a key role for Executive General Manager Retail Distribution Gary Dransfield, who has personnel focused on each direct brand’s ability to extract value from the various distribution channels. The internet-only direct brands are also performing well, with Bingle growing at 80% – “and it’s got a good loss ratio, too,” Mr Milliner says. He believes Bingle has been a strong bulwark against aggressive marketing from recent entrants to the market from South Africa and the United States like Budget Direct, Youi and Progressive. “One of the new entrants who’s been in the market for about five or six years has struggled to get significant market share,” he says. “In fact, they’ve probably stagnated. Their customers are shopping on price and they move around between those brands. “Bingle is set up for the target markets to be the cheapest price and be profitable, which they will struggle to do because they don’t have the same capability we’ve got.” The general insurance operations are also aiming to provide excellent claims service, with Mr Day pointing out that no large company has previously been able to take leadership in claims-handling. “Insurance isn’t just about price; it’s the whole package,” Mr Milliner says. “People buy a promise, and when a claim happens you’ve got to deliver on it. If they have a good experience with the insurer they generally become pretty loyal and stick with you. And we have the sort of scale and range of services that smaller operators can’t compete with.” He says the “broader brands” like Apia already enjoy strong retention levels. “We’re not planning on seeing retention drop off significantly over the next three to four years on the mass market brands. “The technology that will bind the unified services together already exists at Suncorp,” Mr Milliner says. “It’s about rolling it out now. It’s not like we have to go out and buy it. “Five or six years ago we had a whole lot of back-end mainframe systems that were all aligned around products. We had one system for home insurance for one brand that dealt with policy, billing, claims and pricing. “We want to put a system in place around the core processes of an insurance company, and not be purely product-aligned. “It makes sense to have a system that does claims and another one that does pricing, so you’ve got the end control of those pieces. And then ultimately what’s left is a policy system – and that’s a much easier process.” Mr Milliner says Suncorp is “pretty close” to achieving the ideal, with only pricing and billing systems left to migrate across from other systems. The determination to keep major functions centred in one system means Suncorp can easily introduce upgrades, but won’t insuranceNEWS

August/September 2010

have to change the core technology. “We don’t want to end up with legacy systems that haven’t been upgraded for 20 years. In cases like that, you’re stuffed.” Mr Day sees the company’s comparatively late development of a united technology program as advantageous. “In the B2B space we’re probably leading the market now in technology advancements,” he says. “If you look at the various enterprise systems or any that go through Sunrise Exchange, you’ll find we’ve usually been the last major player to come onto that system. So we have the latest and the best. “It’s part of the advantage of being last – you learn from what everyone else has done.” But while the company’s business lines are now capable of stretching a long way, Mr Day says the broker channel is where he’s focusing for significant growth. “I think relationships are critical in the broker market. The closer aligned you are to the broker, the better off you’re going to be. “If you’ve got the right network in play and you’re making it easier for them to do business and also spend more time with their clients, the better your relationship is going to work.” His distribution managers have therefore been charged with understanding what each broker is trying to do with their business. “The relationship game is becoming more sophisticated. We don’t want to waste our time or the broker’s time if our strategies don’t ‘match’. So rather than just flogging products to brokers, these days we’re talking to them about what we can do to help them develop their own business. “There’s no point in trying to discuss PI insurance with a broker who has no PI business. A better result is to find where we want to focus and only focus on those and develop our relationships in those areas.” Mr Day says many brokers are becoming more specialised, and Vero has a wider product range than many brokers realise. “We’re arguably the second-largest commercial insurer in the Australian market,” he says. “I think the old Vero was thought of as a very specialist and niche player. But we’ve got a broad product range, and we touch every type of business from the small sole trader right through to the large global corporates. “Similarly we touch every type of broker, from the small SME generalist through to the major international brokers.” Mr Day says Suncorp’s challenges are now its opportunities. “I think that’s the exciting part about being part of this group. I joined this company because it’s got all the capabilities. It’s about getting focus on where they’re going to make the biggest difference and really executing them well. “We’ve got the broadest capabilities, we’ve got all the products, we’ve got all the services, and we’ve got the broadest distribution. So the opportunity is there. “That’s what’s exciting about the insur ance business.”

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Back on the road again Lloyd’s recalls Keith Stern to the UK to do something he’s become an expert at – building relationships

KEITH STERN LEARNED PLENTY working in Australia for 10 years, and he’s looking forward to applying some of the lessons in his next job. Mr Stern, Lloyd’s Sydney-based Regional Manager for Asia-Pacific, took up a new position as Regional Manager for the UK and Ireland on July 1. While his fondness for Australia and Australians is now firmly entrenched – he took up citizenship in his fourth year in the job – Mr Stern admits that if he’d stayed only a couple of years as originally envisaged, he probably would have left the country with fewer regrets. “One of the first things I had to do in 2000 was deal with a number of run-offs which involved some rather interesting characters and some messy situations,” he says. “It was symptomatic of the era. There were some systemic issues which permeated across the industry at all levels. Then we had the HIH crash in 2001 and in 2002 the Australian Pr udential Regulation A u t h o r i t y enhanced capital solvency to strengthen the capital base of the industry.”

And he had to deal with the Federal Government’s demand in 2000 that Lloyd’s place reserves in Australia – a move that saw the market invest about $350 million in local assets. Today Lloyd’s Australian reserves are worth more than $1.6 billion. The Australian market is also the fourthlargest source of revenue for Lloyd’s, with premiums in 2008 of around $1 billion. Mr Stern was already experienced in regulatory affairs when he arrived in Sydney, and the coming of the Financial Services Reform Act in 2001 honed those skills. But he doesn’t expect his experience is going to be in demand in the London office this time around. “For the first time in nearly 21 years at Lloyd’s I can almost safely say that I won’t have too much to do with compliance work,” he told Insurance News. “We already have a very experienced compliance team in London, so they don’t need me.” Instead, he’ll be developing relationships for Lloyd’s in its home market, ending some anomalies as old as the 322 year-old market. “It’s a curious thing that we’ve never had a representative or a general manager appointed for the UK and Ireland, our second-largest market,” he says. “We’ve never had a dedicated person looking after business development there to help grow coverholder and broker relationships.” Essentially, Lloyd’s UK business gets done in the market’s iconic Lime Street headquarters in London. While Mr Stern’s job will encompass relationships with topend UK brokers and their equally top-end risks, he’s also going to develop links with “the next tier down”. “I think I can use a lot of the experience that I’ve learned here to design what I think the new job should be about and how it should be done,” he says. “Traditionally we’ve sat back and expected the business to come to us. And while we get business from all over the country through the broker relationships, we don’t get to see the SME books – they have usually gone to our competitors.” He says the best way to build business with local brokers is by visiting them, which insuranceNEWS

August/September 2010


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Lloyd’s new man in Australia: Adrian Humphreys is the new Country Manager Australia for Lloyd’s. The former Aon broker has been at Lloyd’s since 2007 as Relationship Manager. He replaces Keith Stern but will also be reporting to him for the time being. Mr Stern is retaining his title of Regional Manager Asia-Pacific until a replacement is appointed.

is apparently a prospect City of London office types don’t relish too much. But fresh from a country where the tyranny of distance is a factor in any relationship-building exercise, Mr Stern is looking forward to hitting the road. “One of the things that I’ve enjoyed about this role in Australia is the ability to not be stuck in the office. Travelling around Australia and New Zealand and the AsiaPacific region many times has been part of the joy of doing this job. “So I’ll be travelling to bring Lloyd’s to the SME brokers in the UK, and using opportunities that I can work with our marketing people on. So if we plan an event, instead of hosting it in London yet again we’ll do it in a provincial town. It’s really no different from Lloyd’s supporting roadshows in Australia.” Mr Stern will also address another old and yawning gap in Lloyd’s UK strategy – the lack of someone to support local coverholders. “Australian coverholders are 50% of our direct book – it’s just over $500 million worth of business. We spend a lot of time developing those relationships and nurturing them. In the UK we don’t actually have anyone doing that.” One of the questions Mr Stern is often asked is why he stayed in Australia eight years longer than originally envisaged. He admits that Lloyd’s did offer him some interesting foreign postings over the years, “but after the first couple of years here we started developing some really good relationships with coverholders and brokers”. “We saw that people were in it for the long haul with Lloyd’s, and there was a growing realisation that we weren’t a market of last resort. It became more fun after that first couple of years, if that’s the right way of expressing it. It was becoming more positive as the mood of the industry changed postHIH.” He says Lloyd’s began to fill some of the capacity shortages in liability lines after 2001, which helped to change the local market’s attitude to the market. And there were some unique features of Australian business cul-

ture that he began to appreciate. “Business here is conducted in black and white for the most part, whereas in other parts of the Asia-Pacific it’s sometimes difficult to do business because people aren’t as frank or as candid. “Here the message isn’t always what you want to hear, but from a business perspective it makes life easier. You conduct business frankly and deal with the cards you’re dealt. It means you’re not wading through treacle. It’s done in good humour as well. I don’t think I’ve ever had a dull meeting in Australia.” But Mr Stern admits the small size of the Australian market also has its downsides. “It’s a shame that there aren’t more players sharing the market. Lloyd’s is one of the top six insurers, and between us we hold 87% of the market. That doesn’t feel right. “It just seems to me that the market would be more competitive if there were more players, each of them with less market share.” He says the growth of the underwriting agency sector is a counter to the dominance of the top-tier insurers. “We’ve chosen to work more closely with the Underwriting Agencies Council (UAC) to help foster the development of the sector. We’re seeing the emergence of a strong, wellregulated, highly professional group of 150 or so companies growing in importance as a rising force in the industry. “UAC members collect about $2.5 billion in premium each year, and Lloyd’s coverholders are responsible for about $500 million of that. “So even while many underwriting agencies have relationships with large local insurers, they still take a little power away from them. “It shouldn’t be an industry that’s dominated by the larger insurers or brokers or cluster groups or whoever. It should be an industry where people come together without worrying too much about the politics of  who’s stronger and who’s weaker.” Leaders farewell Lloyd’s Keith Stern, page 62 insuranceNEWS

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Hoping for a better harvest Major insurers are hoping to reap rewards from investing in the farm sector By Jamin Robertson

PRIMACY UNDERWRITING AGENCY Managing Director Steven Green has watched the agricultural insurance sector’s fortunes rise and fall over the past few years. Like a farmer welcoming rain, the crop insurance specialist is happy to see the major insurers increasing their investments in agricultural lines. His company and competitor Agricola Underwriting Management have entered joint venture deals with Allianz Australia – agreements that Mr Green says should ensure better products and services for clients. “It takes the resources of an Allianz or QBE who are prepared to invest to develop a particular market,” he told Insurance News. “While agencies do the best they can, they don’t always have the finances to make those significant investments.” 32

Allianz has taken a 60% stake in Agricola, extending to 100% within five years. While the size of the Allianz stake in Primacy has not been disclosed, the agency covers a similar book of business to Agricola. Crop cover falls within the fairly broad spectrum that is the agricultural insurance market, which takes in broadacre cover for cereal and non-cereal crops alongside farm packs, forestry insurance and covers for cotton, greenhouse, orchard and viticulture risks. While the target agencies welcome the Allianz deal for its likely impact on product innovation and expansion, it represents curious timing for the German global insurer. Local crops have faced a battering in recent seasons as severe storms and fires rattled and razed the regions. insuranceNEWS

August/September 2010

“The substantial weather perils in the normal general insurance market have badly hit crop,” says OAMPS Insurance Brokers Northern Region Manager Scott Denning. “On the broadacre and farm side, some of the largest individual losses were experienced last year. In the last two to three years, the insurance companies have lost a fair bit of money.” While brokers talk of losses in the “millions” of dollars, insurers’ reactions have been varied. While QBE and Allianz have increased their agricultural insurance business, two major competitors have headed back to the city. Zurich Financial Services Australia last year pulled out of rural insurance, describing the product as a “legacy cover” that comprised only a tiny proportion of its gross written premium. Likewise, Suncorp


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pulled the plug on its rural product after a company review came to the conclusion that it was not a core product. While Allianz politely declined an Insurance News invitation to comment on its acquisitions, the underwriting agency managers it’s now in partnership with were happy to talk. Agricola Managing Director Bernie Mayers says the investment by Allianz in his company is part of a global move by the insurer to develop its crop portfolio worldwide, with temperate regions acting as a hedge to more volatile climates such as Australia. Despite the rigours of recent seasons, Mr Mayers is upbeat about Agricola’s prospects. “Generally, seasonal conditions are looking good across most of the country,” he says. “While we’re still waiting on some good rainfall, generally the industry is bullish about the forthcoming season.” Primacy’s Steven Green is equally optimistic about his firm’s extension of a 10-year old underwriting arrangement with Allianz, scotching a suggestion the insurer may combine the agencies to rationalise operations. “The agencies will operate as separate entities and will continue to compete,” he told Insurance News. “Other agencies will compete with us as well, and the involvement of Allianz doesn’t particularly change anything.” Allianz isn’t the only major local insurer to up its investment in the rural insurance sector, with the ever-acquisitive QBE picking up a couple of its own specialist businesses. Probably the most noteworthy among these was last year’s buyout of Elders Insurance’s underwriting and distribution operations. Under the terms of the $315 million deal, QBE took on 75% of joint venture company Elders Insurance (Underwriting Agency) Limited and 100% of Elders Insurance Limited. QBE has forecast gross written premium of $500 million for the Elders business this year, expecting $30 million in net profit as it pursues “further synergies” and “adds distribution potential”. Since folding the business into its operations, QBE says Elders Insurance has performed ahead of expectations, suggesting greater gains for the agricultural sector in the years ahead. Like Allianz, QBE’s activity in the agricultural sector goes beyond its home borders, such as the $US565 million ($643 million) purchase in April of specialist United States multi-peril crop insurer NAU Country Insurance. And like its German rival, QBE politely declined to discuss its motives when approached by Insurance News. Mr Denning says the insurers’ moves to increase their stakes in the business of crop underwriting is a sign of things to come. “My expectation is that in the next 12 months we will see 11 crop underwriters be-

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come something like six or seven,” he told Insurance News. “That’s a product of lack of profitability, and I think we are also likely to see rates go up as a result.” Insiders hope the presence of major insurers will also act as a spur to innovation, resulting in an improved range of insurance covers for agribusiness clients. One such observer is John van der Vegt, Managing Director of specialist agribusiness insurance broker AgriRisk. He identifies plenty of demand for new products among his clients but says insurers haven’t always followed through with the necessary will or resources. “Named perils have often been limited to one or two, and not necessarily those which pose the biggest threats,” he says. “On cereal crop, for 85% of insurers fire and hail are all that is on offer – but the biggest risk is lack of rainfall. There’s definitely opportunity to expand the book.” Primacy is one agency to respond to that demand with a new named broadacre policy for insuring wheat and sorghum crops called YieldShield. The policy bundles two compulsory sections in field perils and water stress but is clear in stating that it is not intended as a drought insurance product. With water scarcity a common peril in Australia, there is little optimism within the industry about the prospect of governmentsubsidised multi-peril crop insurance such as that which exists in the US. Local farming advocates have previously called for a similar scheme to operate here, and while there is some scope to include multi-peril insurance within the hail and fire insurance framework, insurance insiders have previously dismissed the suggestion in the belief that rural clients aren’t interested in paying premiums when the going is good. Mr van der Vegt identifies another key difference between the US and Australian farm insurance sectors: the US Government paid an estimated $US3.8 billion ($4.3 billion) in subsidies to insurers last year. “There is a massive rural population in the US and that’s a lot of political votes,” he says. “It makes a lot of sense to keep dollars in their pocket, because it keeps the local economies alive. There is no [equivalent] vote out in the regions here, so I can’t see why any government would consider susbidies for insurers. But it’s very expensive to insure when there is high variability in terms of yield.” While commercial viability is likely to exclude those perils to which Australia is most regularly exposed, the presence of major insurers such as QBE and Allianz should ensure the necessary capacity remains. Brokers hope that will extend to greater product innovation that better meets the  needs of rural clients. insuranceNEWS

August/September 2010

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A tough place to be a broker Business culture and restrictive laws crush broking in Japan By Nathan Rayner

JAPAN IS THE SECOND-LARGEST insurance market in the world. It’s also one of the few markets where insurance broking is the least dominant method of distribution for business insurance. Agents acting on behalf of insurers hold 92.9% of the market, followed by direct sales on 6.75%. Brokers hold a tiny 0.29%, according to the General Insurance Association of Japan. Prior to 1996 broking was actually prohibited in Japan, and international brokers including Marsh, Willis and Aon were registered as insurance agents and conducted business on behalf of Japanese insurers. Broking was introduced in 1996 as part of the United States-Japan Free Trade Agreement, and brokers hoped to secure a 10% market share within three years. Obviously that hasn’t happened, and the reasons are easy enough to see. One of the major factors inhibiting insurance broking is keiretsu – the complex relationships between Japanese companies that include cross-shareholdings, financial exchanges, personal relationships and buyer-supplier relationships. This system permeates Japanese business. In banking, for example, favourable lending terms are extended to keiretsu members. Japanese insurance companies are important shareholders and keiretsu members. Their employees approaching retirement age are often appointed as inhouse insurance agents to other keiretsu members and are responsible for arranging insurance policies and personal insurances of company employees. The in-house agents are highly respected due to their age and level of responsibility. It’s a system that shifts the focus on commercial insurance from short-term costs to long-term relationships and cooperation. And it limits the role of the insurance broker. While the broker creates value for the client by negotiating the best-value premium and policy conditions on an annual basis, the keiretsu system values long-term relationships over short-term financial gains. And while the broker might be able to find better cover in one policy period, 34

insuranceNEWS

this benefit is outweighed by the advantage of dealing exclusively within the keiretsu, which ensures the continued prosperity of the entire group. If that wasn’t enough to make the broker’s ability to compete very difficult, insurance regulations provide even more obstacles. Insurance brokers are required to demonstrate their financial means to cover their liabilities. The Government doesn’t accept professional indemnity cover, instead requiring brokers to pay it ¥40 million-¥800 million ($500,000-$10 million) – in cash. This rule makes even the largest global insurance brokers question the value of operating under a broking licence in Japan. Insurance agents aren’t required to make a cash deposit with the Government, because they represent insurance companies which are ultimately responsible for their actions. Japanese regulations also prohibit brokers from entering an insurance contract with a client. This is a severe limitation, because insurers don’t provide credit terms to brokers and premiums must be paid before cover can be issued. This makes it impossible for brokers to provide immediate cover when clients acquire new vehicles, properties or assets. Faced with so many restrictions, it’s difficult to see how brokers can hope to thrive in Japanese business. Their number has fallen from a peak of 55 in 2002 to 32 last year. Some have reverted to agency status and are building their reputation through assisting in-house agents with placements and risk management services. Brokers in Japan are even hampered by their title. “Broker” in Japanese is associated with high-pressure sales tactics – it’s not a word used to describe people who are independent and act on behalf of the insured. Perhaps the first task for insurance brokers in Japan should be to find them selves a new name… Nathan Rayner is an account broker in Willis Australia’s Corporate Risk Division in Melbourne. He recently completed a research project on insurance broking in Japan as part of his MBA course. August/September 2010

KEI (system, family line) RETSU (row, line)


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High-hazard business is our forte

Pacific Underwriting is a specialised underwriter for high-risk industrial property/ISR and complex public and products liability business for the Australian broker market.

Pacific Underwriting Corporation Pty Ltd The alternative market for brokers Level 11, 56 Clarence Street, Sydney, New South Wales, Australia 2000. Phone 02 9249 1500 ABN 77 091 225 535 AFSL 237270 www.pacificund.com.au


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Swiss Re’s Asian tiger The global reinsurer is finding plenty of growth potential in the region’s emerging markets By Jamin Robertson

Bio: Martyn Parker Positions: Swiss Re Head of Asia Division Member of the Group Management Board Lives: Hong Kong Citizenship: British First employer: Mercantile and General Re, 1974

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EIGHTEEN MONTHS AFTER HUGE writedowns prompted a $1.04 billion loss and the exit of its chief executive, Swiss Re is enjoying resurgent fortunes, including strong growth in Asia. Its first-quarter profit of $US158 million ($190 million) represents a 22% improvement on the same period last year, despite the impact of heavy catastrophe losses on the bottom line. Asia is seen as key to the Zurich-based reinsurer’s future prospects, with Swiss Re Chief Economist Thomas Hess forecasting big things for emerging markets in the region following growth in non-life business of around 16% last year. Charged with spearheading the company’s Asian operations is Head of Asia Division Martyn Parker, who is also a member of the Group Management Board. The rapidly expanding Asia-Pacific business takes in property and casualty as well as life and health sectors, giving Mr Parker broad responsibility for the direction of the business in the region. Having held his current Hong Kongbased post for three years in addition to a previous role in Singapore, he is well qualified to make the observation that the region has emerged from the global financial crisis in reasonably good shape. “Asia is showing good growth prospects,” he said on a recent trip to Australia, telling Insurance News he expects growth of around 8% this year. “That’s occurring in emerging and developing Asia with slightly lower growth in more developed areas.” When discussing the Asian insurance market it’s of course difficult to generalise, given the tremendous social and economic variety that exists in the region. For example, when Typhoon Melor struck central Japan last year, insurers covered the majority of more than $US1 billion ($1.2 billion) in total losses – a situation dramatically removed from the 2008 Sichuan earthquake in China where less than $US1 billion of more than $US120 billion ($144 billion) in damage was covered by insurance. It is no surprise, therefore, that China is one of the key growth areas identified by Mr Parker, alongside other boom nation states such as India. But despite all the talk of seemingly endless opportunities in the region, Mr Parker offers a cautionary note, observing that local insurers are still fighting hard to maintain their dominant market positions. “I think the international guys who are insuranceNEWS

picking up property and casualty are dealing with a small percentage of business,” he says. “There’s more in the life side, but it’s not double-digit. It’s the incumbent national companies writing most of the business.” Mr Parker says strong economic growth in China and India may suggest tremendous insurance potential, but foreign players must be wary of chasing top-line growth at the expense of profitability in the face of aggressive local competition. Swiss Re is staking its own claim to the region, where it employs 650 staff in 10 offices across Asia. Aside from reinsurance and insurance operations across the property and casualty and life and health markets, the giant group’s growing array of public-private partnership reinsurance arrangements with local governments is a significant development. One example is the deal Swiss Re signed with the Beijing municipal government in July last year where, under a public-private partnership, the company provides reinsurance coverage for catastrophe risks under Beijing’s government-funded agricultural insurance scheme. Under the terms of the deal, individual insurance companies are responsible for losses below 160% of the annual premium, with Swiss Re and another reinsurer absorbing losses between 160-300%. Losses above 300% are then covered by the municipal government’s agricultural catastrophe risks reserve. “In partnership with governments, those public-private partnerships allow us to be optimistic that a natural catastrophe can be better covered in emerging areas of Asia in future,” Mr Parker told Insurance News. Elsewhere in the region, he is confident the “mattress” approach to wealth accumulation, investment and protection is changing. Dwindling Asian birth rates and the global financial crisis have led to the perception of protection products now being regarded as essential by Generation X and Y professionals. “Risk attitudes are changing,” he says. “In the ’60s a [South] Korean might have had six brothers and sisters to help look after their parents, whereas today there might only be one or two siblings. “People are therefore more focused on protection, and I think we will see good prospects for term life in particular in the years ahead as markets recover.” Swiss Re will be hoping that is one factor  the entire region has in common.

August/September 2010

SUMMIT 28

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still

It’s what we cover and they don’t that sets us apart. At Summit, we promised at the outset we would provide excellent coverage, sensible premiums and first class service. We delivered. And will continue to do so, moving forward with flexibility and innovation as others strive to catch up. As a broker you know that flexibility is crucial when it comes to insurance for prestige homes. Their owners didn’t get where they are by wasting money, so how can they be expected to pay for cover they don’t need?

With Summit, they won’t. This will go a long way towards keeping your happy relationship with your clients. When you place your client’s cover with Summit you can be confident that our guidelines will not change. You’ll also enjoy peace of mind from one of the broadest covers available and the security of cover 100% through Lloyd’s. Summit Prestige Home Insurance is a specialist division of SRS Underwriting Agency Pty Ltd. ABN 89 113 929 516. AFSL 290518.

Enquiries welcome from brokers who want security, service, flexibility and a fast response. Contact Sue Hutchinson or Karen Kearins Free Call — 1800 815 678 Or visit our website for more information www.summitinsurance.com.au

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All images by William R Bullock

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Opening up the office Macquarie Group’s new building shows how a work environment can inspire By Jamin Robertson

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ONE MARTIN PLACE IN SYDNEY MIGHT be the heart of the global Macquarie Group, but the banking and financial services hub a few blocks away on Shelley Street has to be the soul. To describe the building as cutting edge is an understatement. Bold white exterior columns are set in contrast to the sleek glass exterior that, while fetching, goes far beyond modern architectural gimmickry. This “diagrid” is a vital support structure to the building. Its external framework contributes to the vast interior that greets visitors as they pass through the grand entrance on to the ground floor atrium, known as “the Street”. With a bold, brash and brilliantly offbeat interior, One Shelley Street tears to shreds any notion of a conventional office blueprint. This 10-storey block is home to about 3000 employees of Macquarie’s Banking and Financial Group and Macquarie Funds insuranceNEWS

August/September 2010

Group, who relocated from the old Bond Street premises in the middle of last year. One year on, the unique design of the building has become the envy of office workers across Sydney, with features that inspire co-operation, openness, teamwork and common endeavour. While this article aims to show how “activity-based” working can function so beautifully for any industry – including insurance – it’s a little-known fact that many of the features of One Shelley Street’s design and layout follow cues pioneered by Netherlands-based insurer Interpolis. Activity-based working is grounded in the concept of increased innovation achieved through the sharing of knowledge and freedom of movement. At Shelley Street, this means employees are free to access a variety of formal and informal settings to carry out their everyday work, moving from quiet concentration areas and libraries to interactive desks and “collaboration tables”.


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No two days need be the same. Staff access plug-and-play technology and go where they choose, including brightly themed plaza areas like The Library, The Treehouse, The Green Room, The Dining Room, and The Coffee House. They can rub shoulders with bosses, meet and greet colleagues and interact with disparate departments. If they want to work standing up, they can do that, too. Tilburg-based Interpolis is something of an innovator in workplace design, having used activity-based working for more than a decade. Dutch workplace consultancy Veldhoen + Company was an integral partner in that project and was appointed to work on the Macquarie project. Environmental considerations at One Shelley Street have not been ignored, with the building earning Macquarie six-star environmental accreditation from the Green Building Council of Australia. Measures include a water-cooling system incorporating

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nearby harbour water that saves about 30,000 litres of water a day compared to conventional cooling tower systems. The building also uses just 60% of the power used by the previous similar-sized building in Bond Street. The new building is also able to pump about 50% more fresh air around the premises compared to a conventional airconditioned building, while storage capacity is reduced from about 5sq km to just 1.1sq km of space thanks to wireless technology that has also reduced paper wastage by an estimated minimum 35%. Topping all of this off is an upper-level entertainment deck with panoramic views over Darling Harbour. Though the end result is spectacular, the design and construction of such an impressive office environment was no easy task. Macquarie Business Services Division Director Anthony Henry says the site was originally pegged as a residential development including existing basement levels insuranceNEWS

August/September 2010

featuring a bus terminus and swimming pool. Successful negotiation of those obstacles has paid dividends, with Macquarie forecasting a $110 million saving over 10 years thanks to space consolidation, sustainability features, activity-based working and technology such as wireless networks. The project has also won the widespread approval of staff, with a recent survey confirming 93% of staff would oppose a return to the old way of working. Mr Henry says in addition to providing a blueprint for other Macquarie premises, the building also acts as a model for other organisations interested in harnessing the benefits. “We’re happy to use this building as a reference point for other organisations interested in understanding about creating a great place to work,” he says. “I know I could talk about this project all day long.” Given the effect of working where he  does, few could blame him. 39


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lawNEWS

Nothing stands still for long

Insurance lawyer Samantha O’Brien keeps up with the swift pace of change By Ben Oliver

40

PINNING DOWN INSURANCE LAWYER Samantha O’Brien for an interview is no easy task. After weeks of back-and-forth emails and phone calls, several confirmations and cancellations later, Insurance News finally got to spend a few minutes with the busy Queenslander. Named in the latest “Best Lawyers” list published by the Australian Financial Review, Ms O’Brien works to a demanding schedule. The DLA Phillips Fox partner holds considerable sway in the insurance law field, whether she’s willing to admit it or not, and her services are in demand. “You see a lot of these ranking systems,” Ms O’Brien says. “I was very surprised as there are a lot of good lawyers on this list. It’s nice to be named, but at the end of the day it’s not that important to me. “It doesn’t give you a reputation; that’s something you have to build.” Since starting her articles in Brisbane with Blakes (before expansion to Blake Dawson) in 1991, Ms O’Brien has steadily built that reputation, and is now regarded as one of Australia’s experts on insurance regulation, distribution, commercial arrangements and acquisitions. Her father is a retired university academic, her mother a retired teacher, her grandfather a lawyer and her brother a serving police officer. On her third rotation through Blakes while on her articles, she arrived in the insurance division in 1993 – and ended up staying. “It just kind of happened,” she says. “Intellectually I found as I moved away from litigation to the more commercial side of the insurance industry there was a lot more interesting stuff there, and really good people. “Insurance is really a cornerstone industry.” After spending a decade with Blakes, Ms O’Brien moved to Sydney in 2002 when she was offered a partnership at DLA Phillips Fox, one of Australia’s leading insurance law insuranceNEWS

August/September 2010

firms. She moved back to Brisbane in 2006. She says one of the biggest changes in how a modern law firm works is the immediacy of communication. “I’ve gone from fax machines to email,” she says. “It does change how you do things. There is no waiting for the letter to come through the door any more.” Waiting is not an appropriate word to describe the state of insurance law. Rather, Ms O’Brien sees it as continually active. From prudential and consumer regulation to more recent changes to the Insurance Contracts Act, the industry has barely had time to draw breath from the conclusion of one legislative update before the commencement of another. Federal Financial Services Minister Chris Bowen kicked off the changes in March with an overhaul of unfair terms provisions, releasing a discussion paper that sets out five options for Government action to “prevent consumers of standard-form insurance contracts from suffering detriment due to terms… that are unfair or harsh”. While an amendment bill proposes an extension of the duty of utmost good faith to third-party beneficiaries and a provision for ASIC to launch a “public interest” action against insurers, Ms O’Brien says one of the more interesting changes affects online purchases. Insurance contracts law mandates paper records be sent to an insured once insurance is placed – a situation that she finds ridiculous. “Generally speaking, a lot of the things the Insurance Contracts Act requires of insurers has to be given in writing,” she says. “It’s an example of where insurance law has been lagging behind the real world. “If you are a customer and you are buying insurance online, you don’t need your [product disclosure statement] sent in the mail.” She’s more tolerant of product disclosure statements. New regulations promoting short and simple product disclosure state-

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lawNEWS ments are now in place for some financial services products, but still exclude general insurance. The disclosure statements are now intended to run to around eight pages – a significant downsizing from some statements which read more like novels at 100-plus pages. But the need for them isn’t in question, Ms O’Brien says. “I think everyone would like them to be shorter and I think things are starting to change there. The statements are bound by what the law says they must contain. It’s a balancing act in terms of how the law looks at it. I personally think the majority of insurers’ product disclosure statements are pretty good documents, although consumer groups would probably disagree.” Consumer groups and Ms O’Brien are also likely to clash over insurers’ pursuit of the uninsured for damages. Consumer advocate Lawyer Denis Nelthorpe recently called on insurers to take a “sensible” approach to third-party property damage caused by uninsured drivers who have little income and few assets. He argues that driving individuals with no assets and no real income into bankruptcy is a waste of taxpayers’ money and gains insurers nothing. But Ms O’Brien says this is a deceptive argument. “Insurers won’t spend money if they don’t believe they will win the case,” she says. “They will always apply commercial judgement before pursuing damages. I just say, why not? “If insurers choose not to pursue, that means recoveries go down and premiums go up,” she says. “It’s not a clear line, but conceptually that is the result. It’s unfair to the people who do insure.” Insurers are also coming under increasing pressure from their customers in the form of class actions, culminating in recent proceedings launched by residents of the Queensland town of Roma. Slater & Gordon Practice Group Leader Peter Long has accused insurers of incorrectly classifying a genuine storm event as flood after record rainfall pelted southwest Queensland in March and flooded about 200 homes in Roma. Some insurers declined claims by citing flood exclusion clauses. Ms O’Brien says the climate for class actions is only going to worsen as litigation funders join the party. “At the end of the day, you have to give the right advice,” she says. Litigation funders are prepared to bankroll more than just battles with insurers. Shareholders are also restive. “We’ve certainly seen increased activity in claims against directors,” Ms O’Brien says. “This is where the litigation funders are coming in. If the share price tanks, people are looking for a reason or someone to sue. “You wouldn’t want to be a director on a company about to list, and you wouldn’t want to be their directors’ and officers’ insurer either,” she says. Which is why taking the advice of someone like Ms O’Brien is becoming all the more important. Even if it does take you  weeks to meet her. 42

Harmed by horror

Two rescuers at a crash scene pursue a case for pure mental harm to the High Court By Katherine Bland, a lawyer, and Berren Hamilton, a senior associate at Moray & Agnew Lawyers IN JANUARY 2003 A FOUR-CARRIAGE passenger train left the tracks at high speed near Waterfall station, south of Sydney. Seven of the 50 passengers died and many others were injured, some very seriously. Two police officers, Wicks and Sheehan, were among the first to arrive at the scene. They were confronted with dead and injured people in the wreckage of the train. They forced their way into the damaged carriages and did their best to help the survivors and get them to safety. The State Rail Authority (SRA) admitted the accident happened as a result of its negligence. Wicks and Sheehan sued the SRA, alleging that as a result of being present at the crash site and witnessing the aftermath, insuranceNEWS

August/September 2010

each suffered psychiatric injuries. “Pure mental harm” is the expression used to describe a psychiatric illness which is not caused or related to a physical injury. Under common law reasonable care must have been taken to avoid the plaintiff suffering pure mental harm when it is reasonably foreseeable that a person of normal fortitude might suffer it in the circumstances. In New South Wales, the Civil Liability Act 2002 limits the circumstances in which a plaintiff may recover damages for pure mental harm. Section 30(2) limits recovery for pure mental harm arising from shock “unless the plaintiff witnessed, at the scene, the victim being killed, injured or put in peril; or the plaintiff is a close member of the family of the victim”. At trial in the NSW Supreme Court and on appeal it was held that the requirements of section 30(2) were not satisfied, and the police officers were not entitled to recover damages, because “while they witnessed the aftermath, they did not witness any victim of the derailment being killed, injured or put in peril”. Nor was either officer a family member of any of the victims. The High Court held that before consideration can be given to section 30(2) it must first be determined whether the SRA


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lawNEWS

News Ltd

Terrible scenes met the first rescuers: investigators on the scene of the Waterfall train disaster that killed seven and injured many others

owed to the police officers the relevant duty of care, and referred this question of law to the NSW Court of Appeal to decide. Overturning the earlier Court of Appeal decision, the High Court also held that, if the relevant duty of care was owed, then section 30(2) was satisfied, and would not prevent the police officers from recovering damages, because: • While the event of another person being killed, injured or put in peril must have been happening while the plaintiff witnessed it, such an event may take place over an extended period. This was such a case, at least regarding victims being injured or put in peril. The consequences of the derailment took time to play out. The perils to which the survivors were subjected did not end when the carriages came to rest; • It may be inferred that some who suffered physical trauma in the derailment suffered further injury as they were removed from the wrecked carriages; • Many who were on the train must have suffered psychiatric injuries as a result of what happened to them in the derailment and at the scene, and as they were being removed from the train, at least some of the passengers were still being injured; • If either inference is drawn, then the

police officers witnessed, at the scene, victims of the accident “being injured”; • The survivors of the derailment remained in peril until they had been rescued by being taken to a place of safety. The police officers therefore witnessed victims “being put in peril”; • The reference to “victim” is to be read as a reference to one or more victims. In a mass casualty there is no need to attribute part or all of the plaintiffs’ mental harm to what happened to one particular victim. All seven members of the High Court held that the claim by both police officers arose wholly or partly from a series of mental or nervous shocks, and that it would be wrong to confine the “shock” they suffered to what they perceived on first arriving at the scene. The sudden and disturbing impressions necessarily continued as the officers took in more of the scene and set about their tasks. While the High Court held that section 30(2) did not apply to facts of this case, there will be circumstances where the Act’s limitations will apply to prevent a plaintiff from recovering damages. If all of the passengers on the train were killed when the train derailed and were all already dead before the police officers arrived at the scene, insuranceNEWS

August/September 2010

then the High Court’s decision may have been different. Recovery of damages for mental harm on this basis has not been tested in the courts. The High Court noted that foreseeability is the central determinant of a duty of care and framed the question to be decided by the Court of Appeal as follows: Was it reasonably foreseeable that, at a train accident of the kind that might result from the SRA’s negligence (in which there might be many serious casualties and much destruction of property), sights of the kind a rescuer might see, sounds of the kind a rescuer might hear, and tasks of the kind a rescuer might have to undertake to try to ease the suffering of others and take them to safety, would be, in combination, such as might cause a person of normal fortitude to develop a recognised psychiatric illness? If the Court of Appeal decides that the relevant duty of care was owed, then to recover damages the officers will still need to establish that they each suffered a recognised psychiatric illness. In Mr Sheehan’s case this is in dispute. The Court of Appeal has directed that there be a mediation and that if the claims are not resolved at mediation, then there  be a retrial in the Supreme Court. 43


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lawNEWS

If it’s complex, use a broker A recent court case highlights the pitfalls of negotiating PI cover in big commercial contracts By Callan O’Neill, a senior associate at Wotton + Kearney in Sydney

44

A RECENT CASE IN THE WESTERN Australian Supreme Court provided a poignant insight into the complexities of arranging proper insurance cover for large-scale joint ventures. It also demonstrated the need for specialist brokers in the negotiation of insurance cover related to complex contracts. In Allstate Explorations NL v Blake Dawson Waldron, Justice Eric Heenan had to consider whether law firm Blake Dawson (formerly Blake Dawson Waldron) had been negligent in its advice relating to the insurance provisions within a joint venture mining and backfill construction contract at Beaconsfield Goldmine in Tasmania. The matter included an examination of the nature and extent of professional indemnity (PI) cover required for projects of this nature. The mine was owned by a joint venture consisting of five of the six plaintiffs. In 1998 Allstate Prospecting Pty Ltd, as the manager of the mine, engaged law firm Blake Dawson to advise on the settling of the contract, which was valued at about $20 million. The negotiations considered insurance cover, including PI cover for the proposed contractors. After construction began the contractors did not meet their performance obligations and a major dispute resulted over the contractors’ liability for alleged inadequate performance. At arbitration, the joint venture parties were awarded more than $60 million, but the contractors were unable to satisfy the arbitration award and became insolvent. The joint venture parties recovered very little of the $60 million. They and Allstate then considered recovery under the insurance arrangements negotiated under the contract. The contractors were obliged by the contract terms to obtain and maintain project-specific and general PI insurance for $20 million. It was accepted that the award for $60 million against the contractors included claims for professional negligence. It was also accepted that liability for those claims amounted to at least $20 million. A claim was made, but the professional indemnity insurer denied liability on the grounds of a material non-disclosure. Threats of litigation were made, but the insurer and the plaintiffs – both Allstate and the joint venture parties – settled without any admission of liability for $13 million. insuranceNEWS

The plaintiffs then sued Blake Dawson, claiming the law firm had failed to advise that the insurance cover that was actually written for the PI risks did not meet the requirements of the contract. Essentially, the plaintiffs’ complaint was that they had received $7 million less than they would have received if the contractors’ insurer had been liable to indemnify them to the full extent of what was contractually agreed. The plaintiffs had to prove that had they been advised of the alleged inadequacies in the insurance cover, they would not have allowed the contract works to begin until satisfactory cover had been obtained; or failing that, that they would have considered terminating the contract entirely. Blake Dawson argued at trial, and Justice Heenan agreed in his findings, that the type of PI cover required on the plaintiffs’ interpretation of the contract was not available. Justice Heenan also decided the contract did not specify and require insurance cover of the nature or character which would respond to the kind of claim advanced by the plaintiffs. He also found that any inadequacy with the PI cover did not cause or contribute to the loss of which the plaintiffs complained, and the policy would not have responded in the way the plaintiffs contended. This case highlights the need for specialist brokers in negotiations for contractual insurance provisions who are aware of the limitations and availabilities of cover available in the market. Specialist broking advice on both sides of a transaction is critical to ensure that parties are appropriately protected. There are also significant risks involved in leaving insurance arrangements to be dealt with once all other contractual matters have been negotiated. While there is nothing wrong with negotiating insurance after other parts of the commercial contract have been agreed, it is risky unless the parties are fully advised of the coverage required and the cover that is available. Finally, courts will look to the commercial reality of the products available in the market at the time of creating the deal as the ultimate test of what can be achieved. Specialist advice is critical to ensure that the insurance required under a contract is available.

August/September 2010

6


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Why understanding climate change is vital

News Ltd

The insurer that prices to recoup future losses will be better off

A rising tide of climate-related risks: a car goes belly-up on the beach after being washed out of the Currumbin Surf Life Saving Club’s car park during wild weather on the Gold Coast last year

46

THE INSURANCE INDUSTRY remains at the forefront of exposure to the more long-term physical risks associated with climate change. Broadly speaking, these physical risks focus on an increased frequency and severity of extreme weather events and the resulting increase in insured losses. This is expected to have further adverse impacts on capital requirements and reinsurance costs. Nevertheless, an increase in premiums will probably offset the impact of higher costs, with owners of property and infrastructure assets likely to bear the brunt of the higher costs. Also important for the insurance industry will be the likely increase in demand as extreme weather events become apparent. Insurers need to thoroughly understand and quantify the likely claims outcome, which includes an assessment of expected attritional losses (typically high frequency, low value and relatively predictable) as well as catastrophe-related losses (which are typically low frequency,

high value and unpredictable). Climate change will clearly impact on catastrophe-related losses, and insurers who are better able to understand the frequency and severity implications will be able to price to recoup prospective losses rather than price to recoup past losses.

Increased frequency and severity of extreme weather events The most obvious impact of a changing climate on the insurance industry is the increased frequency and severity of extreme weather events.

This report was written by Aimee Kaye, a researcher at Macquarie Securities, with input from Tony Jackson. It has been edited and abridged. The original report is part of a series of research pieces examining the broader environmental, social and governance issues that can impact the performance of investment portfolios.

insuranceNEWS

August/September 2010

Given the role of the insurance industry in protecting consumers and businesses against the losses incurred, any increase in damaging weather-related events will result in higher costs for insurance companies. Insured catastrophe losses are already trending upwards. It‘s important to note that this trend is not just a result of increases in insurance coverage. Research by Munich Re suggests the trend for broader economic losses is even more pronounced, at roughly three times the trend level of insured losses. But this rising trend does not only reflect the impact of climate change. Population and economic growth as well as urbanisation – particularly in coastal areas – also play a role. Another pertinent risk for Australia is bushfires. Modelling indicates that the frequency of days with either “very high” or “extreme” forest fire danger index readings could increase 4%-25% by 2020 and 15%-70% by 2050. The risk is particularly concentrated in Victoria and central New South Wales. Modelling also suggests that av-


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The factors:

 Increased frequency and severity of extreme weather events

 Higher capital requirements  Higher reinsurance costs

 Increased demand for insurance

48

Page 48

erage (as opposed to extreme) wind speed will increase by 2%-5% in most coastal areas by 2030. As IAG has previously noted, “even small increases in event severity (less than 10%) can cause multiple increases in damage”. Given the increase in expected costs, the Garnaut Review on Climate Change in 2008 noted that insurance premiums “are likely to rise to reflect the increased uncertainty and potential impacts of climate change over the coming years”. One of the few studies on the impact of climate change on insurance premiums has been undertaken by the Association of British Insurers (ABI). Based on the increase in average annual insured loss under climate change modelling, the ABI estimates that a 4°C temperature increase would increase premiums by 27%. No such modelling has occurred in Australia. However, a useful starting place to provide a rough estimate is the Bureau of Transport Economics data on average annual cost from natural disasters. The key weather-related losses in Australia pertain to flooding, severe storms, cyclones and bushfire, with an average cost of $1 billion a year. In estimating the likely increase in the annual average cost, it’s necessary to make several logical assumptions. For example, an increase in the cost of bushfires will follow the expected increase in the Forest Fire Danger Index. It’s assumed that the increase in the cost of cyclones will follow the average expected increase in the intensity of such windstorms. Currently available climate change modelling is less clear on flood risk. Keeping in mind the risks of higher sea levels and more frequent severe weather, we assume a 10% increase in the average annual cost of flooding. This produces a 9.4% increase in the annual average cost of events, or an extra $100 million a year, with the most affected state being Queensland, followed by Victoria and then NSW. However, there is a considerable degree of uncertainty around this figure, given the earlier observation that higher weather-related risks resulted in much higher costs. It’s therefore useful to also consider a higher estimate of a 20% increase in average annual losses. It is then possible to estimate the increase in pricing in the same manner as the ABI, as insurance companies are likely to increase premiums to offset higher losses. First, we allow for a very conservative assumption that fixed expenses for insurance companies represent an additional 10% on top of insured losses. Secondly, it is assumed that insuranceNEWS

August/September 2010

variable expenses and profit load are 25% of an adequate risk-appropriate premium. On this basis, the potential impact in price could be expected to be 1.47 times the observed increase in average annual loss. In other words, based on an annual average cost of 9.4%, we expect insurance premiums, on average, to increase by 13.8%. Under the higherloss scenario, premiums would increase by 29.4%.

Higher capital requirements Given the increased frequency and severity of extreme weather events, insurance companies will need to manage not only an increasing average loss burden but also an increased maximum loss burden. Considerable uncertainty surrounding the exact change in climate also has the potential to reduce the ability of insurers to assess and price weather-related risks. Both of these developments – higher losses and higher uncertainty surrounding the frequency of future losses – will likely result in higher capital requirements to bridge the gap between expected and extreme losses. As the probability distribution of expected losses from weather and climate related-incidents widens, both the average loss and the extreme loss increases. With the extreme loss increasing at a much greater rate, the risk-based capital required to meet 99.5% of claims while maintaining solvency will also increase. This is apparent in the ABI research. Under a 4°C temperature increase in the UK, the average annual insured loss increases 14% while the 1-in-200 year loss increases by 32%. The ABI therefore estimates that the potential change in minimum capital for the UK as a result of higher flood risks associated with climate change is £2.5 billion ($4.31 billion). That said, under a more severe climate change scenario this could increase to £5.5 billion ($9.5 billion). Similar estimates for the additional capital required due to increased wind damage resulting from climate change is roughly £1.3 billion ($2.24 billion). Such estimates do not yet exist for Australia, nor does the current modelling facilitate the calculation of such information. Nonetheless, it should be noted that, as part of its response to the 2009 Carbon Disclosure Project, IAG highlighted the prospect of higher regulatory capital requirements as a risk stemming from climate change. In contrast to IAG and Suncorp, QBE maintains a lower exposure to natural catastrophe volatility via an

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extremely diverse portfolio both by class of business and territory. Less diverse, geographically concentrated insurers are likely to require increasingly higher capital loadings or reinsurance protection for the implications of climate change. This could prove a driver of longterm industry consolidation as less diverse insurers with a higher cost of capital and reinsurance are acquired by insurers with much greater portfolio diversification.

Higher reinsurance costs Climate change is a global phenomenon. Hence significant losses internationally could have an impact on the price of reinsurance or other risk transfer instruments such as catastrophe bonds. Indeed, as part of our recent survey of Australian insurers regarding climate change risks, IAG noted that “significant losses internationally could impact the pricing of

Austra

($125.4 billion) in weather-related insured losses in that year. The impact on reinsurance markets, while significant, was not as marked as Hurricane Andrew, with the catastrophe insurance market being considerably more mature and supplemented by access to additional sources of capital through the hedge fund industry and a deeper and more sophisticated alternative risk transfer market. It is possible to very roughly estimate the likely impact on property catastrophe pricing for a given change in the level of catastrophic loss. A large reinsurance company’s cost of capital is represented by the average bond yield on AAA and BAA rated corporate debt. A very basic regression of the change in reinsurance prices – based on the catastrophe losses of the previous year and the movement in the cost of capital – suggests that a $US1 billion ($1.13

“Extreme price increases associated with a quantum lift in expected storm frequency and severity could eventually lead to reduced demand as a result of increased self-insurance and government scheme-based insurance” reinsurance or other risk transfer services”. Nonetheless, the likely impact of climate change on reinsurance prices is yet to be the subject of any rigorous quantitative research. The process is made more complex by the difficulties in estimating the total size of global catastrophe losses going forward. Also, catastrophe reinsurance pricing is impacted by a number of factors in addition to the incidence of catastrophes. Last year property catastrophe reinsurance rates increased by roughly 8%. This was largely due to reinsurers protecting their earnings following the erosion of their balance sheets during the financial crisis, exacerbated by material losses associated with Hurricanes Ike and Gustav in 2008. Hurricane Andrew in 1992 resulted in a sharp rise in reinsurance costs in what was then a relatively immature market. These price rises were not reversed for the better part of a decade. Hurricane Katrina in 2005 also resulted in substantial losses, with a total $US111 billion 50

billion) increase in insured catastrophe losses will result in a 0.6% increase in reinsurance prices the following year. Of course, a large margin for error exists around this estimate.

Increased demand for insurance The increased frequency and severity of extreme weather events may result in higher demand for insurance. Indeed, research by the Centre for Disaster Studies at James Cook University suggests that in the aftermath of Cyclone Larry many farmers updated and increased their insurance policies. This included those who did not incur direct insured losses as a result of the cyclone. But extreme price increases associated with a quantum lift in expected storm frequency and severity could eventually lead to reduced demand as a result of increased self-insurance and government scheme-based insurance. How are the Australian insurers positioned? The United Nations Environment Program Finance Initiative recently undertook a comprehensive survey of

insuranceNEWS

August/September 2010

the impact of environment, social and government (ESG) factors on the insurance industry, in which 18 insurers globally – including IAG – participated. One of the themes that arose from the research was the role that proper management of ESG factors played in enhancing insurance company earnings and long-term value via avoided losses and new product offerings. In order to avoid loss appropriately, insurance companies should first have the ability to thoroughly understand and quantify the risks involved, before seeking to mitigate and transfer the risk via new product offerings. As part of our assessment of the relative position of each of the Australian listed insurers, we conducted a survey on their research into and understanding of the risks and opportunities around the physical risks from climate change. Of the three major insurers, Suncorp and IAG responded. Both companies are to varying extents following the international research on climate change, or, in the case of IAG, contributing to it. IAG’s natural perils research team has undertaken climate change research focused on tropical cyclone frequency, intensity and impacts, as well as the potential changes to hail impacts in the Sydney region. The group has also undertaken preliminary work on quantifying these risks via cost-based modelling. But while insurers are indicating that the modelling is starting to inform their decision-making, it was noted that climate change is just one of a number of trends that are important for the sector. These include trends in property location and type, building codes and materials, and population wealth and demographics. This is, of course, to be expected. The risks from climate change are inherently long-term. While companies may be well placed to deal with the long-term risks, it is difficult to quantify the valuation impact of this strategic positioning. Indeed, IAG noted that “from the perspective of managing your insurance business on a day-to-day operational basis you will be looking three to four years ahead”, but that “simultaneously, you will also want to be prepared for the future so will have a view to the much longer term as well”. Insurers who are better able to understand the frequency and severity implications will be able to price to recoup prospective losses, rather than price to recoup past losses, and may therefore experience less volatility relative to their  peers.


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companyNEWS

Lumley’s newest team Corporate Solutions starts up with a group of experienced managers and support staff By Lydia Brisbout LUMLEY INSURANCE HAS stepped into the competitive large corporate market with the formation of its Corporate Solutions unit. The move gives Lumley the ability to provide specialist property and liability insurance to large corporate clients seeking tailored services – with a local focus. Traditionally a small to medium enterprise insurer, Lumley is stepping into direct competition with the big insurers for large ASX-listed private and government business. The new unit will specialise in seven key sectors: food and beverages; machinery and metal manufacturing; media, leisure and entertainment; government business; financial institutions and property investors; transport and logistics; and utilities and infrastructure. Head of Corporate Solutions Rob Funnell says Lumley is well positioned to offer a credible alternative for large companies with its focus on providing “personalised and tailored services to each and every customer”. “We are pursuing a specialist approach,” he told Insurance News. “The sectors we are targeting are sophisticated buyers of insurance and there is often complexity in these risks that our team has both the experience and capability to handle. “And as part of the Wesfarmers Insurance group, Lumley also offers the necessary balance sheet stability that is a 52

fundamental requirement of any insurer working in this space.” The new division was launched at functions in Brisbane, Melbourne, Sydney and Adelaide, with a Perth function planned for early this month. The events allowed Chief Executive Vivek Bhatia to introduce the Corporate Solutions management unit to brokers – although most of Mr Funnell’s team are already well known in the market. They include property underwriting specialists Thomas Easo, Melanie Sutton, Mark Chisholm and Adit Witjaksono; liability underwriting specialists Jason Henry and Paula Brophy; and risk engineering specialists Dale Laidlaw, Edwin Micallef and Natalle Kitson. Experienced Network Manager Tracey Byrnes is setting up the unit’s overseas network. Lumley has also employed a number of other specialist support staff to ensure the company is able to service large corporates from the very start. One of the major areas of focus for the new team will be providing local decision-making and claims settlement, increasing the ease and convenience of doing business for brokers and their clients. Mr Funnell says the Corporate Solutions division has already received good support from a number of key industry sectors and has been “warmly  welcomed by the market”. insuranceNEWS

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companyNEWS

Back to the future with Z.streamXpress: Zurich aims to entice brokers back to its improved electronic platform

BACK IN OCTOBER 2002, WHEN ZURICH launched its web-based delivery system Z.stream to much fanfare, it claimed the platform was a “revolution” in the way brokers would do business. The company said the Z.stream delivery system was “a boon for brokers” – and it certainly was innovative. The new platform allowed brokers for the first time to process business insurance via the web, spawning a series of copycat systems from Zurich’s competitors. As online policy processing continued to evolve, Zurich’s offering lagged behind – which the company admits allowed competitors to match and eventually overtake it on the online policy front. New Zurich General Insurance General Manager Shane Doyle is wasting no time in sharpening Zurich’s focus on technology 54

development, culminating in the release of its brand new online processing tool, Z.streamXpress. General Insurance Chief Operating Officer Daniel Fogarty told Insurance News it’s a new platform with an old name, which Zurich hopes will return it to the top of the online processing pile. “With Z.streamXpress we are back in business,” Mr Fogarty says. “We want to be the one brokers put their commercial insurance with.” Z.streamXpress, he hopes, will change broker perceptions about Zurich’s approach to policy formation, which some brokers saw as too rigid. “Because we’ve lacked the underwriting flexibility at the back end, it’s been a bit hard to get over the line on some business,” he says. insuranceNEWS

“One thing we really want to do right now is change brokers’ perceptions. “We are saying to brokers, try Zurich for the stuff you didn’t think we could do.” Following the “soft” launch of Z.streamXpress in March, Zurich now has the platform online and already operating at 70 brokerages nationwide. More than 800 brokers are expected to be online with Z.streamXpress once Zurich adds business insurance alongside its workers’ compensation product, which is expected to be up and running in late September/early October. The launch of workers’ compensation products online is a cause for celebration in itself, with brokers previously placing such insurance manually via phone or fax. Zurich hopes other improvements will also entice brokers back to Z.streamXpress. Mr Fogarty says Zurich invested heavily in the user interface and flexibility of the new offering. Features of Z.streamXpress include the ability to attach notes to a quote, an ABN validation tool, connection to Google Maps, flexible excesses and a quote upload facility. Z.streamXpress will also feature a “save as you go” function and the ability to print certificates of currency. “We want to keep building more features and products into it,” Mr Fogarty says. Starting with workers’ compensation, and with business insurance locked in for later this year, Zurich will add marine to its online offering next year. Mr Fogarty says the company is conducting scoping work for a number of other products. While Zurich has an eye set on future development, he says the other eye is fixed firmly on broker training. “When we roll it out we want to make sure we are doing the right training,” he says. “We’ve listened to what brokers want and we’ve designed Z.streamXpress around their needs. I think brokers will see that when it comes out.” Unlike the false dawn of 2003, Zurich will be hoping 2010 is the dawn of a new  era for Z.streamXpress.

August/September 2010

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companyNEWS

Dam clever: the Floodsax absorb water and then protect against flood

Goodbye to the sandbag …and hello Floodsax, the high-tech answer to an age-old problem By Lydia Brisbout

Specs: » Energised with water from a bucket, watering can, hose or even the flood water itself. » Within three minutes the bag will expand to the size of a “traditional” sandbag. » Five year shelf life. » Home Pac: Contains five Floodsax with four measuring 45cm x 35cm and one measuring 90cm x 9cm. When energised with water they will absorb up to 12 litres. Designed to protect one door. Cost $99 including gst. » Commercial Pac: Contains 20 larger Floodsax measuring 45cm x 50cm. When energised with water they will absorb up to 22 litres. Designed for larger situations. Cost $349 including gst.

56

THE UBIQUITOUS SANDBAG – FILLED WITH soil and stacked in great numbers as flood waters threaten – may soon be a thing of the past. Floodsax Australia, a social enterprise of the Brotherhood of St Laurence, has acquired the rights to distribute a high-tech derivative called Floodsax. They weigh just 0.2 kg, making them easy to transport and use, but contain crystals that can absorb up to 22 litres of water. The Floodsax then mould to their setting and function as a traditional sandbag. They are puncture-proof, biodegradable and last for up to eight weeks. The innovative product has already proved its worth, being rushed into service during the Melbourne floods in March. Seeing the flooding around CBD shops on the news, Floodsax Manager Grantley Reed distributed the super-absorbent sacks to businesses, helping them limit damage to their stock and premises and – in some instances – keep trading. Floodsax Australia hopes to work with individuals, local councils and state emergency services to promote comprehensive disaster management plans for communities and businesses. The Mackay Regional Council – which has dealt with several major floods over the past few years – has already recognised the value of Floodsax and is subsidising the purchase of “inflatable flood bags” by residents. “With the extreme weather conditions that insuranceNEWS

have occurred this year in Australia, we have seen that a lot of these events happen very quickly,” Mr Reed told Insurance News. “Floodsax are so portable and easy to use they empower everybody to help protect their home or business against flooding and accidental water damage, and it only takes minutes to energise the bags and deploy them.” He said Floodsax are particularly good for the infirm or disabled who would struggle with traditional sandbags, as well as businesses in retail complexes where flooding in one shop can affect a large number of premises. Brotherhood of St Laurence General Manager Social Enterprises Jeff Moon says Floodsax also offer great advantages to insurers. “It would be beneficial for insurance companies to give a rebate on their premiums to people or businesses who purchased Floodsax, because they could save thousands of dollars on one single claim. And usually if there is a flash flood you have hundreds of claims, so there is a multiple effect.” He says the sacks are also useful in the aftermath of flooding or water damage, because they can be used to soak up and remove contaminated water. Floodsax business packs and home packs are being distributed through hardware retailers. Profits are returned to the community through Brotherhood of St Laurence programs assisting low income and vulnerable members of  society.

August/September 2010

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INSURANCE SOLUTIONS ON DEMAND

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companyNEWS

Reputation is important, too: Sterling’s new contaminated products cover offers protection in all sorts of ways

UNDERWRITING AGENCY Sterling Insurance has unveiled a Lloyd’s-backed contaminated products cover as part of a key focus on public and product liability for the food and beverage sector. Sterling partner Tony Parington says the cover, underwritten by London-based Sagicor, offers clients a broad wording with minimal exclusions. “The cover is very useful in that it’s not just a ‘replace and recall’ cover but one that covers reputation, which people forget can break a company,” he told Insurance News. The cover offers a wide range of benefits including pre-recall costs, recall costs, retained consultants, increased cost of working, rehabilitation and incident response costs. The policy responds to incidents where products are contaminated by accidental

product contamination, malicious product tampering or product extortion demands. It is expected to appeal to a broad range of industries, including fruit and vegetable producers, dairy, meat, seafood, poultry and packaging companies, as well as firms dealing in wines and spirits. Cover for “nutraceuticals” – food or food products that provide health and medical benefits – is also available, as well as exports to the United States. Mr Parington’s qualifications in chemical engineering and food safety and hygiene make him ideally qualified to deal in the product, which he says further benefits from its specific wording for the Australian market. The minimum premium for Sterling’s contaminated products insurance is $5000, with the cover attracting a  commission of 17.5%.

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To be Frank, one of the best The industry mourns the death of an outstanding insurance broker

AUSTRALIAN INSURANCE BROKING LOST one of its champions last month with the death of Frank Earl after a long and brave battle with cancer. He was 63. Widely known in the Australian and London markets, he was deeply respected as a professional indemnity specialist whose word was his bond. New Zealand-born Mr Earl was most recently a non-executive director on the board of Austbrokers and chaired the AIMS joint venture’s professional indemnity committee. He was also serving as a director of broking group IBL at the time of his death. His professional career included periods as the Managing Director of Arthur J Gallagher, Minet Australia and Minet Professional Services. He also served on the National Insurance Brokers Association board from 2000, chairing its education and finance committees. He was NIBA President in 2003/04 and in 2007 was awarded the Lex McKeown Trophy for services to the association and broking. Last year the Australian Insurance Law Association presented him with the AILA Insurance Prize for his “substantial contribution” to the insurance industry. The term as NIBA President came at an important time for the local broking sector and the wider industry. Many were still reeling from the various impacts of the HIH collapse and also coming to terms with the transition to the new regulatory environment of the Financial Services Reform Act. The Act’s much tougher regulations for intermediaries were seen as undermining the unique role that brokers play in the general insurance industry. Mr Earl acknowledged the anxiety of older brokers, but advised calm. Even as NIBA worked with regulators to remove some of the more unworkable imposts, Mr Earl kept the broking sector focused on the possibilities of greater industry professionalism and accountability. Brokers’ continued dominance of commercial placement owes much to his leadership. While acknowledging the possible inroads into the brokers’ market that could be made by other financial specialists like accountants, he borrowed the American brokers’ marketing term to urge Australian

brokers to focus on being the “trusted choice” of business. A champion of professional education, he was a strong supporter of NIBA’s role in educational development through NIBA College. One of his many industry friends and current NIBA President Steve Lardner describes Mr Earl as an outstanding broker with unmatched technical knowledge. “He had a lot of experience in the specialised area of PI and through that business and industry involvement he built up a wonderful list of colleagues and contacts across the world, many of whom became lifelong friends.” One international colleague, Londonbased THB broker Stuart Donnan, spoke of a man devoted to his family, his friends and the business of broking. “I was privileged to have known Frank for 25 years,” he said. “His dedication to his clients, and indeed his markets, knew no bounds. Twelve-hour days were his norm – he gave it everything.

insuranceNEWS

August/September 2010

“They don’t make Frank Earls any more.” While Mr Earl’s consensus approach to industry affairs was widely admired, brokers also remember him as a man who would stand his ground to defend concepts he believed strongly in. But as friends and colleagues have noted, he was best known for his spirit of collaboration. “Whether it was a strategy or a special problem like HIH or the Financial Services Reform Act, he would take the big picture and seek a commonsense way through the mire,” Mr Lardner told Insurance News. “And he tried to take people on that journey with him.” Outside of work, his colleagues and friends recall his great sense of fun. Like most good brokers, Mr Earl was a great socialiser, enjoying the company of friends and family. Though Austbrokers Chief Executive Lach McKeough, a close friend of Mr Earl’s, fondly describes him as “Aussie to his bootlaces”, Mr Earl was in fact born in the small New Zealand town of Waimate, and retained an ardent admiration for the All Blacks rugby team, when his “competitive spirit” came to the fore. “He was a real character,” Mr McKeough said. “Frank would bat on all night and be up at 6am the next day wanting to go for a walk. He had an enormous constitution for work and relaxation, and he became a great mate.” Outside of professional circles, family was the top – possibly the only – priority for Mr Earl, who is survived by wife Dianne, their two daughters Melanie and Amanda and two grandchildren. Mr Earl’s enormous contribution to the local insurance industry was reflected in a huge congregation of more than 400 industry leaders, colleagues, friends and family who gathered in Sydney last month for his funeral at St Gerard Majella’s church in Carlingford – where he was a long-serving member of the parish’s finance committee. As one London underwriter wrote in a message that Mr Donnan read out at the funeral: “Frank was a great man in insurance but more than that – a true gentleman with a real sense of right and wrong. He will be  sorely missed.”

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Leaders farewell Lloyd’s Keith Stern The ballroom in Sydney’s Four Seasons was packed with a who’s who of Australia’s intermediary and underwriting agency sectors when Keith Stern bowed out last month as Lloyd’s man in Australia. The fact that people came from around the country to say farewell to him spoke volumes about the regard in which he is held. After 10 years growing the market’s business in Australia – and becoming an Australian citizen – Mr Stern’s typically downbeat speech at the function focused on the friendships he’s made rather than the deals he’s done. There have been plenty of both. Moving back to London to take up a new market development role at Lloyd’s, he told his Sydney audience that “it’s the people I’ve got to know here who have made this period in my career and my life so rewarding”.

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peopleNEWS

SLE, Pacific launch a ‘new innings’ Guests literally came from far and wide recently when underwriting agencies SLE Worldwide Australia and Pacific Underwriting celebrated the move to their new premises in Clarence Street, Sydney. Representatives of Novae Syndicates Ltd, SLE’s and Pacific’s underwriters at Lloyd’s for the past 11 years, and London brokers Towers and Tyler & Co flew to Australia for the launch. Clients were also well represented, with guests from Chugg Entertainment, the National Rugby League, NSW Country Rugby League and ANZ Stadium also attending. Managing Director Brad French says the event also celebrated the underwriting agencies’ new independence, and heralded the “start of a new innings on a new pitch”.

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Calliden combines business and beauty THE WOMEN’S EVENTS HELD BY insurer Calliden are a unique way to combine learning about the company’s products and getting some tips on personal appearance. The first function was held in Perth in March. The latest event, held in Melbourne last month at Docklands,

attracted 90 female brokers. The “speed-dating” approach of the event allowed groups to rotate between eight booths – four providing information about Calliden and its products, and the other four offering fashion, hair, make-up and nutrition tips.

insuranceNEWS

August/September 2010

Calliden Assistant Marketing Manager Rachel Sozzi says the functions recognise the increasing importance of women in insurance and are a way of thanking female brokers for their support. The next Women’s Event will be held in  Brisbane on October 15.

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peopleNEWS Insight explores the possibilities A record 234 brokers, partners, sponsors and exhibitors converged on Hobart’s Wrest Point Casino for the Insight Insurance Brokers Association conference in late May. The three-day program, based around the slogan “Exploring the possibilities”, featured a variety of technical and practical sessions, networking and great food and entertainment. Keynote speakers included Lumley Insurance Chief Executive Vivek Bhatia and QBE General Manager Australian Intermediaries Shaun Standfield. Simon Hepworth, 21, took out Insight’s CGU Norm Dyer Award of Excellence. The Customer Service and Claims Officer at Lillingston & Marshall Insurance Brokers was presented with the award by CGU’s National Manager – Metropolitan, Jim Karafilis. Insight took advantage of the gathering to announce a major membership change that will see independent authorised representatives given Associate member status. Next year’s conference will be in May at the Hyatt Coolum, Queensland.

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Crawford launches its large loss division Major loss adjuster Crawford & Company Australia is spreading its wings with the launch of its new Global Technical Services division at the Museum of Sydney last month. The event attracted about 120 insurers, brokers and risk managers, with a pre-cocktails session providing information about the new division, which specialises in the management of large and complex claims. Guest speakers included Crawford specialists as well as Ace Insurance Executive Loss Adjuster Michael Hand.

WH40047

The Sydney launch followed the Melbourne launch on July 8 at the RACV Club. Chief Executive Andrew Bart says the Global Technical Services division is regarded as a “positive initiative with broad support�.

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To learn more QBE’s T o lear n mor e about QBE’ s latest initiatives contact your local QBE rrepresentative, epresentative, or visit intermediary.qbe.com.au intermediary .qbe.com.au

QBE Australia Pr oud to be your NIBA General Insur er of the Year Year 2002-2009* 2002-2009* Proud Insurer Australian Banking & Finance Best General Insurance Company 2008 QBE IInsurance QBE nsurance ((Australia) Australia) L Limited imited ABN ABN 78 78 0 003 03 1 191 91 0 035 35 A AFS FS L Licence icence N No o2 239595 39595 *Awarded *Awar *A warded to a QBE Gr Group oup Company


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Lions, tigers, brokers, kids and one swan The gates of Sydney’s Taronga Park Zoo were thrown open to brokers and their families recently as QBE hosted a day with the animals. Thankfully none of the zoo’s thousands of inmates escaped, although a certain Swan did make his way in. Sydney Swans AFL team recruit Mark Seaby was the special guest at QBE’s family fun day – now in its third year – where QBE staff, intermediary partners and their families are treated to a day of keeper presentations and animal encounters. More than 160 attended this year’s event, which included a bird show featuring blackbreasted buzzards, Andean condors and wedge-tailed eagles. Kathryn Steven of Aon Corporate Risk Services in Brisbane was the winner of QBE’s Roar and Snore competition, which was marketed through insuranceNEWS.com.au. The prize included a night spent camping on the grounds of the zoo and travel to Sydney. QBE has been a sponsor of the Taronga Conservation Society since 2005.

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From Africa to Great Lakes

Adrian Norman is back, and he wants a slice of the marine insurance action By Ben Oliver

THE POST-EMPLOYMENT pursuits of high-ranking managers, often euphemistically derided as “gardening leave”, are a time for corporate heavyweights to recharge their batteries, reflect on their careers and plan the next move, or a combination of all three. However it’s defined, “gardening leave” isn’t a term which could be used to describe the post-Associated Marine adventures of its former Managing Director, Adrian Norman. After stepping down from the Zurich-owned company in early 2008, Mr Norman undertook a two-month extension course to his commercial pilot’s licence in Melbourne and then returned to working as a commercial pilot in southern Africa. Mixing flying with regulatory consulting, Mr Norman’s break from insurance even involved a project to fly seafood from Namibia to Zimbabwe in light aircraft, using a blast-freezing process that keeps foodstuffs at minus 25°C for up to 24 hours. “We got to Zimbabwe and were told it would take an hour to clear customs, and it took nearly three and a half hours. It’s 35°C and the plane is sitting out there in the sun, and you are sweating bricks.”

Mr Norman’s African adventures came to an end last year when he began to plan his return to Australia, and to marine insurance. After intensive research, negotiations with German reinsurer Munich Re came to a head in January, when he was appointed head of a new marine insurance division for Munich Re subsidiary Great Lakes Australia. With nearly all the pieces in place – including several senior colleagues lured from his former employer – the new Great Lakes Marine Insurance Agency is taking up its first business this month. “I’ve done start-ups before, including in the insurance industry, but never quite as ambitious as this,” Mr Norman told Insurance News. “Every day is a new initiative. There is a real sense that you are building something from the ground up, and what it will be is what you put into it.” The new Great Lakes Marine Insurance Agency will be run out of Sydney and Christchurch, with an initial staff of eight to 10 people. Focusing on the “upper end” of the market, Mr Norman says the agency will offer a service increasingly sourced offshore – marine risk consultancy. “There are some opportunities being created in the market at the moment in the specialty area, not just marine,” he says. “I think there have been a lot of structural changes in the industry – the move towards increasingly streamlined operations, common platforms, common brands, common distribution channels, common products. If you like, it’s the insuranceNEWS

commodotisation of commercial insurance. “But what falls through the cracks in times like this is specialty business and specialty expertise.” Mr Norman says the new agency will work exclusively through brokers to provide an end-to-end risk service. Far from competing directly with existing players, Mr Norman says he doesn’t want to be “another Vero or Associated Marine”. “We don’t even have any marketing staff,” he says. “All of our people are very high-level technicians. “What we are offering for major accounts, unusual accounts, mining, industrial and logistics is crafted solutions, as opposed to just providing marine cover.” Mr Norman has the experience to carve out a niche for Great Lakes in the highly competitive Australian marine insurance sector. He has been working in the sector since 1985. In 1987 he was appointed Associated Marine’s Underwriting Manager for Victoria, and in 1988 was seconded to then part-owner GRE in Hong Kong to oversee GRE Asia’s development of marine insurance in the region. He worked in several countries – including a period as a bush pilot in southern Africa – before eventually becoming Managing Director of Zurich in Malaysia. He says the departure from Associated Marine, which he ran for nearly four years, was amicable. “In the end there were directions the group wanted to go as a company that I didn’t necesAugust/September 2010

sarily support,” he says. “I thought it was best to move on.” He says Associated Marine is a “good company with a good group of people”. So good, in fact, that he poached General Manager Underwriting Andrew Black, General Manager Marine Special Risks Anton Edwards and General Manager Claims Willum Richards. Mr Norman says it was strictly business. “It would be naïve to say it hasn’t caused some stresses, and we certainly have nothing but respect for the guys there.” Looking to the future, he makes it clear his previous zeal for pushing professional education hasn’t waned during his absence. “We also have a commitment to educate and develop marine expertise in this country,” he says. “We are a trading nation and it’s incumbent upon us in the insurance industry to look at what are the needs of this country going forward. “Our wealth is in no small part dependant on what we can ship out of this country. Our shipping industry has been in decline for a considerable period of time and people in the shipping industry are doing their best to encourage the Government to do what it can to encourage the strengthening of the Australian fleet.” Mr Norman also believes an efficient marine insurance sector is vital for Australia. “If we are to stay in the game we need to improve all of the peripheral services involved with trade and shipping. In insurance, that’s what marine and logistics maritime is all about.”  71


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Queenslanders vote for QBE QBE staff in Brisbane had every reason to look happy after picking up the Council of Queensland Insurance Brokers’ (CQIB) All-rounder Award, the top prize at the council’s annual Queensland Day celebration. Steve McCall, QBE’s District Manager, Intermediated Distribution, received the award for the insurer (below). Held at the Southbank River Room in Brisbane, the event attracted more than 300 local professionals and guests, and also served to mark 30 years of service to the state’s insurance community by CQIB.

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The awards were based on voting by council members, with the unique All-rounders Award recognising the insurer that does most things right. Allianz was runner-up. QBE also won the Claims Service Award, while CGU was voted as the winner of the Domestic Insurer Award. UAA won the Underwriting Agency Award. CQIB represents more than 60 Queensland firms that place more than $500 million in annual premiums from more than 200,000 clients.

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MGA meets in Christchurch

CHRISTCHURCH PLAYED HOST TO MGA Insurance Brokers’ recent annual conference, and while the city doesn’t have an MGA broker operating there, General Manager Paul George admits he’s intrigued by the concept of a cross-Tasman expansion. The 2010 MGA conference was the first to be held outside its South Australian base, hosting 96 people over two days for what Mr George describes as the most successful event the company has held so far. The decision to hold the event in Christchurch reflected the company’s

broader expansion plans, Mr George told Insurance News. “I guess we were ready for a change,” he says. “We’ve got more people coming from interstate to our conference and New Zealand was a good option. “We are also quite interested in expanding into New Zealand.” From humble beginnings in Adelaide’s leafy suburbs, MGA Insurance Brokers, a member of the Austbrokers Group, has emerged as a truly national player, encompassing 55 authorised representatives.

Mr George says next year’s conference will return to Adelaide, but a “special” interstate location will be selected every three years. The emphasis at this year’s event was on business management and product breakout sessions. “These varied fairly widely to suit the needs of our representatives who are working in different areas,” he says. “There was also a variety of different products to learn about, depending on where the  individual came from.”

Team-building exercises sometimes have an element of risk with them, although MGA was confident delegates at its conference could complete their team assignments without too much trouble. Delegates got to know Christchurch by completing a range of tasks, including taking team photos in front of allocated landmarks, finding the answers to a list of questions about the city and solving various problems. Team members are pictured hard at work getting lost in front of (clockwise from above) Cathedral Square, the Bridge of Remembrance and a city tram. All returned safely to the conference.

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maglog » THE “BARBARA” ADS BEING run on TV by ANZ are intended to make you believe that all other banks except ANZ are run by mean-minded shysters. When I was learning marketing, approaches like that were regarded as lazy and counter-productive. Why? Because consumers believe from their own experience that banks are (insert suitable expletive). So they absorb the mean and horrible “Barbara” stereotype as supporting their own views about banks, while sneering at the notion that any bank could be customer-friendly. We haven’t forgotten the past 20 years yet, fellas – you’ll have to do better than that. The Barbara character is deliciously watchable, however, and I’ll bet the focus groups’ reactions have assured all concerned that yes, it’s really a cut-through ad. People are getting the message, all right – except the message is still that all banks are bastards.

So it’s good that the general insurance industry has generally shied away from the “Barbara” approach, keeping its advertising on-message with the “trust us” or “we’re cheaper” lines of thought. They won’t win awards, but I’m assured they do win people over. Most of the insurance advertising action is taking place in personal lines motor, where long-established companies and new brands with catchy names are going head to head. What we haven’t seen yet on the insurance front is product comparison advertising, where one company lists its prices and features and then compares them against a competitor’s. It worked for Volkswagen in the US during the 1970s, and as the direct market gets more and more crowded, it may well happen here. Let’s just hope they keep it straight when they start to savage each other, and leave the 74

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Terry McMullan Publisher

“we’re nice, they’re all greedy monsters” game well alone. Brokers are particularly exposed when direct insurers decide to move in on the commercial lines market. When the “creatives” in advertising seek something to differentiate them from the pack, they all too often decide to attack brokers. The logic goes that direct sales don’t involve commission, so that’s why they’re cheaper. And they can’t resist making it insulting, either. Some of the greatest offenders have been the direct arms of large insurers, and it’s only when brokers complain to the companies’ commercial lines managers that the penny drops, the ads get pulled off air and everyone involved pretends it wasn’t their idea.

Maglog in our last issue suggested that then Prime Minister Kevin Rudd might just have had a problem with focusing on a subject long enough to understand it. Written by staff journalist Ben Oliver, the column was intended as a lighthearted look at why federal politicians can’t focus on and don’t really care much about things like insurance taxes. Even the Mandarin was authentic. We don’t think Ben had inside knowledge when he portrayed the PM as a ping-pong fanatic with a need to be loved while suffering from attention deficit disorder, but it’s an inescapable fact that shortly after publication we all got a new prime minister. Ben is modestly protesting that no, really, rightwing ALP apparatchiks don’t read Insurance News.

When former Insurance Council of Australia Chief Executive Kerrie Kelly quit her job running the Association of British Insurers after less than five months, there was a fair bit of resentment back in Sydney at an unnamed source in the insuranceNEWS

UK media describing the preKelly ICA as “a fading trade organisation”. Where on earth did they get that idea? Was he referring to the same Insurance Council as the one which guided its members through the HIH crisis, and the cripplingly hard market, liability crisis and tort reforms that followed? Because many people with a memory longer than four years believe the pre-Kelly ICA was anything but “fading”. In fact, if you want to stack up the pre-2006 achievements of ICA against all that has been accomplished since, you’ll find the record of former chief executive Alan Mason and his team is – well, a lot more impressive.

The death of “the brokers’ broker”, Frank Earl, is covered elsewhere in this issue. The Insurance News management team was lucky enough to get to know Frank really well, and he was always referred to around this office as “Chairman Frank”. That came from his decision when we first set up in business to be our mentor as we negotiated the many minefields of the insurance industry. He was always happy to advise on the best person to contact on various complex topics, and I once spent an intense hour with him on the phone as I googled my way around Asia searching out a very dubious reinsurer, with Frank throwing in seemingly unconnected suggestions and names until we tracked the company down to an address in Manila. Frank was always a terrific dinner companion, with his late night “cleansing scotch” before turning in. Always sharp as a tack and tough-minded when he needed to be, his long battle against a particularly cruel form of cancer revealed a man as brave as he was wise. He’s sorely  missed. August/September 2010

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